Research & development (R&D) tax credits

Quick facts

An R&D tax credit is a cash payment from the government to encourage companies to do R&D. There are two different types: Small and medium sized enterprises (SME) R&D tax relief and Research and Development Expenditure Credit (RDEC).
R&D tax credits are a tax incentive (in the form of a cash payment) from the government, designed to encourage companies to invest in research and development.

There are two types of R&D tax credit:

•      Small and medium sized enterprises (SME) R&D tax relief – you can claim up to 33p for every £1 spent on R&D if you have no more than 500 employees and meet the maximum turnover or balance sheet criteria. 
•      Research and Development Expenditure Credit (RDEC) – if you’re a larger company (or you’ve been subcontracted do R&D work by a large company) you can claim an RDEC tax credit worth 12% of your qualifying R&D expenditure.

R&D tax credits are a tax relief designed to encourage greater R&D spending, leading in turn to greater investment in innovation. They work by either reducing a company’s liability to corporation tax or by making a payment to the company. 

A SME may claim a higher rate of relief than a large company. Also, a SME which has no tax bill to reduce may claim a cash payment instead. 

R&D tax credits were introduced for SMEs in 2000 and extended to large companies from 2002. An additional “top-up” relief for vaccines research was introduced in 2003 – known as Vaccines Research Relief (VRR)

If you’re a limited company and you want to research or develop an advance in your field you might be able to apply for R&D tax relief. R&D projects must be in science or technology, but HMRC’s definition is broad and includes investment into technology and IT systems. Software developers, architects and many other professions have all successful claimed R&D tax relief as a result of this tax incentive. You can even claim on unsuccessful projects – or if your business is running at a loss.

If you think you’re eligible, you file a tax credit claim as part of your CT600 form – alongside your accounts – with HMRC at the end of the financial year in which you spent money on an R&D project. HMRC then processes your claim and, if you’re successful, pays you a tax credit. If you want cash more quickly, then you can also consider an R&D tax credit loan. This is a newer type of loan that uses your future R&D tax credit payments (from HMRC) as security.

For all R&D tax credits, you must be able to explain how:

  • you looked for an advance in science and technology
  • you had to overcome uncertainty
  • you tried to overcome this uncertainty
  • your advance could not be easily worked out by a professional in the field

You can apply for R&D tax credits in conjunction with grants. R&D tax credits are a retrospective tax relief that you claim after you’ve begun your research and development. Grants, by contrast, are up-front funding for which you have to pitch.

  • As of 30 June 2020, there have been 59,265 R&D tax credit claims for 2018-19, of which 52,160 are in the SME R&D scheme.
  • As of 30 June 2020 £5.3bn of R&D tax relief support has been claimed for 2018-19, corresponding to £35.3bn of R&D expenditure.

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