R&D tax

Research and development tax credits, otherwise known as R&D Tax Credits, were conceived by the UK government as a stimulus to reward UK companies for investing in innovative projects that drive economic growth and technological advancement among British businesses.

They make it possible for firms engaged in genuinely innovative research to reduce their corporation tax liability by significant amounts. This frees up funds for reinvestment into the business or simply to keep it buoyant during the development of new products and services.

R&D Tax Credits and Relief Explained

R&D Tax Credits: There are two main strands of tax credits for research and development – the SME scheme, aimed at small to medium enterprises (SMEs), and the Research and Development Expenditure Credit (RDEC) for larger companies.

R&D Tax Relief: Research and development tax relief is generally applicable to engineering businesses, software firms, technology startups, green energy businesses, and other such sectors. However, it can also apply to creative firms, such as visual effects houses in film production.

If you think your project might qualify for R&D relief, get in touch to discuss the eligibility criteria with one of our tax credit specialists.

R&D Tax Credits and Relief for SMEs

If your business qualifies as a small to medium enterprise with fewer than 500 employees, an annual turnover below €100 million, or a balance sheet total under €86 million, you meet the base criteria to apply for R&D relief.

The next test you need to pass involves your project’s eligibility:

• Does it seek to achieve an advance in science or technology?
• Does it address scientific or technological uncertainties that a competent professional could not readily resolve?
• Did your team overcome technological uncertainty during the research?

These tests are nuanced and rely on case-by-case judgement rather than absolute rules.

If you pass these tests and HMRC agrees your project qualifies, you can deduct an additional 130% of qualifying expenditure from your taxable profits, on top of the standard 100% deduction, amounting to a total deduction of 230% for accounting periods beginning before 1 April 2023.

R&D Tax Credits and Relief for Large Companies

Larger businesses are not eligible for the SME scheme but can claim under the Research and Development Expenditure Credit (RDEC), which replaced the large company scheme in April 2016.

The same criteria apply to determine project eligibility, focusing on scientific or technological uncertainties and advances.

Qualifying costs include:

• Staff costs for employees directly engaged in R&D activities
• Expenditure on subcontractors undertaking qualifying research
• Consumables used within the R&D process
• Costs of production and distribution related to R&D

RDEC is calculated at 12% of qualifying R&D expenditure incurred after 1 January 2018, increasing to 20% for accounting periods starting on or after 1 April 2023.

For profit-making companies, RDEC takes the form of a taxable credit shown in the income statement as a payable tax credit, reducing the corporation tax bill. Loss-making companies may receive a cash credit.

The Merged Scheme from April 2024

From accounting periods starting on or after 1 April 2024, the government has introduced a merged scheme that combines previous SME and RDEC schemes into a single, streamlined tax credit system applicable to all UK companies regardless of size.

This merged scheme offers a 20% above-the-line expenditure credit on qualifying research and development costs, simplifying the claims process and expanding the scope of eligible costs, including reimbursed expenses and cloud computing costs.

Loss-making SMEs with high R&D intensity may also qualify for enhanced intensive support, allowing them to claim a higher payable tax credit.

Making an R&D Tax Credit Claim

To make a valid claim, you must:

1. Ensure your project involves qualifying research addressing scientific or technological uncertainties.
2. Calculate and document qualifying expenditure, including staff costs, subcontracted R&D, and consumables.
3. Submit a claim as part of your Company Tax Return (CT600), accompanied by an R&D Additional Information Form detailing the nature of your projects and costs.

It is advisable to seek assistance from experienced tax consultants or tax specialists to navigate the claims process and maximise your entitlement.

HMRC requires companies to notify them of their intention to claim R&D relief within six months of the end of the accounting period.

Claims can be made up to two years after the end of the accounting period in which the R&D took place.

Next Steps

Arrange your discovery call with our specialist R&D tax consultants here for expert advice on your eligibility and guidance through the claims process for R&D tax relief and credits for your business.