R&D tax credits UK

UK R&D tax credits are not taxable income, but for RDEC claims, the credit is classed as taxable income.

No, an LLP cannot directly apply for R&D tax credits as an LLP is not subject to corporation tax.

No, sole traders do not pay UK corporation tax and are therefore not able to claim R&D tax credits.

Your business must meet certain additional criteria in order to apply to receive R&D tax credits; for example, it must be a registered limited company and subject to corporation tax in the UK.

If you’re a startup, and you’re eligible, you’ll be able to claim R&D tax credits.  

Businesses can submit an R&D tax relief claim within two years from the end of their accounting period. Accounting periods are usually 12 months long.

• Work out the costs that were directly attributable to R&D.
• Reduce any subcontractor or external staff provider payments to 65% of the original cost.
• Add all costs together.
• Multiply the figure by 130% to get the additional deduction to put into your tax calculations.
• Add this to the original R&D expenditure figure, which you can enter into your tax return.

You will need to provide evidence to support your claim, with a written explanation of how your expenditure:

• Looked for an advance in science or technology and aimed to achieve this advance
• Had to overcome scientific or technological uncertainty
• Overcame this uncertainty
• Could not easily be worked out by a professional in the field

Your application must also include: the start and end dates of the accounting period of your research and development work (note: you can only claim tax relief for up to two years beyond the end date of this accounting period); your unique tax reference number; the total amount of tax relief you wish to claim; a summary of your costs; your unrelieved trading loss for the claim period.

Yes, you can claim R&D tax credits if you’re a loss-making business. A loss-making SME can claim back up to 33p in every £1 of qualifying expenditure and surrender the loss for cash tax credit at a rate of 14.5%.

The exact figure you are entitled to depends on additional factors, for example whether your business is profitable, loss making or breaking even and how much corporation tax you pay. If your business is profitable, you could claim up to 25% of your R&D expenditure, while if you are breaking even or making a loss that figure is likely to be 15-33%.

Because of the generosity of the SME R&D tax credit scheme, it is considered to be notified state aid. This means you cannot claim SME R&D tax relief on projects that have been funded by a notified state aid grant.

However, RDEC is not considered state aid, so you may still be able to claim tax relief this way if your project was funded by a notified state aid grant.  

No, R&D tax credits are classed as notified state aid, not de minimis.

De minimis aid is defined as a grant of less than €200,000 over a three-year period and is

not as generous as notified state aid. There is no requirement for the provider to make a specific notification to the European Commission. However, if a company has received de minimis aid, it cannot claim SME R&D tax credits for the proportion of the project which has been funded by the grant.

R&D tax credits were introduced by the UK government in 2000 for SMEs and in 2002 for large companies.

As of April 2023, and first announced in the 2022 Spring Statement, qualifying expenditure now includes data and cloud computing costs where they have been incurred as part of a qualifying R&D project. Research done in the area of pure mathematics also qualifies for R&D tax relief.

Additionally, there is now increased focus on providing support for R&D activities in the UK, but expenditure on R&D activities outside the UK can continue to qualify for tax relief if there is a material or regulatory requirement for this work to be carried out overseas.

Note that corporation tax also rose from 19% to 25% in April 2023.

R&D tax credits are paid as a reduction in your corporation tax liability (if you’re profitable), a cash credit (if you’re unprofitable) or as a rebate on the tax you’ve already paid. Occasionally, it could be a combination.

If your company has received a grant or subsidy you may still be entitled to R&D tax relief, but you will need to claim via the Research and Development Expenditure (RDEC) scheme.

As with the SME R&D tax credit scheme, this can be claimed against your corporation tax liability or paid as cash. However, your entitlement is likely to be significantly lower, around 12% of your research and development expenditure.

You can usually expect to receive your R&D tax credit repayment within 28 days of submitting your claim.

SME R&D tax credits and R&D expenditure credit (RDEC) are two distinct schemes under the UK Government's R&D tax credit program, each tailored to cater to the needs of different sizes of businesses.

SME R&D tax credits:

SME R&D tax credits are specifically designed for small and medium-sized enterprises. Key features include:

1. Enhanced deduction: SMEs can benefit from an enhanced deduction, allowing them to deduct an additional 130% of their qualifying R&D costs from their yearly profit, on top of the standard 100% deduction.
2. Loss-making companies: Even if an SME is operating at a loss, it may be eligible to surrender these losses fork a payable tax credit, providing a valuable injection of cash into the business.
3. Focused on profitable companies: SME R&D tax credits are aimed at supporting profitable companies seeking to innovate and enhance their competitive position.

R&D expenditure credit (RDEC):

RDEC is geared towards larger companies or SMEs engaged in collaborative R&D projects. Key features include:

1. Above-the-line tax credit: RDEC provides a 13% above-the-line tax credit on qualifying R&D expenditures, offering a more direct financial benefit compared to the traditional corporation tax reduction.
2. Applicable to grant-funded projects: It is particularly suitable for companies receiving grant funding or involved in collaborative R&D initiatives, expanding the scope of eligible activities.
3. Focused on larger enterprises: RDEC caters to larger companies with substantial R&D expenditures and a broader range of collaborative or grant-funded projects.

In summary, SME R&D tax credits provide enhanced deductions and cash benefits for small and medium-sized enterprises, especially those operating at a profit. On the other hand, R&D expenditure credit (RDEC) is directed at larger enterprises or SMEs involved in collaborative R&D projects, offering an above-the-line tax credit for qualifying expenditures. regardless of the company's profitability. The choice between the two depends on the size, financial status, and nature of the R&D activities of the business in question.

Similar to business grant advances, R&D advance funding allows you to receive your tax relief much faster than waiting for HMRC to pay out. Read all about R&D advances here.