An R&D tax credit is a cash payment from the government to encourage companies to conduct research and development, as well as other innovative activities.
18.6% of your qualifying R&D for SME R&D tax relief and 12% for RDEC
Government tax relief to encourage R&D
Receive cash 4-8 weeks after filing your claim for tax credits
Limited companies carrying out R&D in science and technology (including IT – it’s a broad definition)
Varies depending on the size of your claim
R&D projects must relate to science or technology, however HMRC’s definition is broad and includes investment into IT systems, data, cloud computing, mathematics (a new addition), and more. The range of businesses carrying out qualifying activity is ever expanding. Various events over the past few years, notably the pandemic and Brexit, have meant companies have had to step up their innovation to overcome restrictions.
If you’re building a startup or developing processes and products to meet a demand in an evolving market, it’s likely that you’ll qualify for research & development (R&D) tax credits. R&D tax credits can be claimed for up to two years prior to the date of your claim. This gives you some time to get your business organised and make sure that all qualifying activities and costs are captured.
Our trusted specialists help you maximise your claim by identifying innovative activities while simplifying the process and taking care of your claim for you.
A word from Andrea
"Research and development (R&D) tax credits can be claimed for up to two years prior to the date of your claim. This gives you some time to get your business organised and make sure that all qualifying activities and costs are captured."
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Research and development (R&D) describes a business’ attempts to improve their knowledge in their field in order to increase revenue streams by creating new products or processes, or improving existing ones.
According to HMRC, the work that qualifies for R&D tax relief must be part of a specific project to make an advance in science or technology. It cannot be an advance in social science, such as economics, for example.
The project must relate to your company’s trade and you need to explain how it:
R&D tax credits are a tax incentive designed to encourage businesses to invest in research and development. The scheme allows a proportion of a company’s R&D spend to be recovered as either a reduction in corporation tax or as a cash payment.
Read more: our guide to April 2023’s R&D tax credits changes.
There are two types of R&D tax relief and which one you qualify for will depend on the size of your company and whether the qualifying project has been subcontracted to you.
You can claim small and medium sized enterprises (SME) tax relief if you have less than 500 staff and a turnover of under £100 million or a balance sheet total under £86 million.
SME R&D tax relief allows companies to:
Large companies can claim a research and development expenditure credit (RDEC) for working on R&D projects. The same applies to SMEs that have been subcontracted to do R&D work by a large company.
The main benefits of R&D tax credits include:
The rate at which the SME R&D tax credit is calculated depends on whether your business is profit or loss making.
If your business makes a profit, R&D tax credits will reduce your corporation tax bill by up to 25%. But if your business is loss making, you’ll receive your tax credit in cash and the rate of relief is between 15% and 18.5%.
If you qualify for the RDEC, this is paid as a tax credit and is calculated at 13% of your company’s qualifying R&D expenditure (this applies to expenditure incurred on or after 1 April 2020). As this is taxable, it results in a cash benefit of 11% after tax.
Research and development can take place in any sector, so any of the following could qualify:
Eligibility isn’t limited to the size of your business; small scale startups right through to large companies can benefit. Subcontractors may also be eligible.
Qualifying expenditure for R&D includes:
If you’re a profit-making SME you could claim a maximum amount of 25% of your R&D expenditure. If you’re loss making you can claim a maximum of 10%.
If your SME makes a profit, you can claim up to 25p on every £1 spent on research and development. The claim on R&D tax credits can cut your corporation tax bill by deducting the eligible R&D expenditure from your annual profit, which could save you 230% in total.
A loss-making SME can claim back up to 10p in every £1 of qualifying expenditure and surrender the loss for cash tax credit at a rate of 14.5%.
Large companies can claim up to 11p for every £1 of qualifying spend.
Example 1: Profitable SME
|Corporation tax before claim||£200,000 x 19%||£38,000|
|R&D qualifying spend||£100,000|
|Enhanced R&D qualifying spend||£100,000 x 130%||£130,000|
|Revised profit||£200,000 - £130,000||£70,000|
|Corporation tax||£70,000 x 19%||£13,300|
|Corporation tax saving||£38,000 - £13,300||£24,700|
Example 2: Loss-making SME
|Corporation tax before claim||£0|
|R&D qualifying spend||£100,000|
|Enhanced R&D qualifying spend||£100,000 x 130%||£130,000|
|Revised loss||£200,000 + £130,000||£330,000|
|Surrendable losses to HMRC||£100,000 x 230%||£230,000|
|Tax credit received||£230,000 x 14.5%||£33,350|
Your SME R&D tax credit is not taxable income. It is a below-the-line benefit and will be shown in your income statement as either a corporation tax reduction or a credit.
If your claim reduces your UK tax liability, this will be reflected in the tax line of your income statement and in your corporation tax creditor – known as double entry accounting.
To post your company’s tax (pre-R&D):
To reduce your company’s tax charge to reflect your R&D claim:
Then, when a company receives a tax refund:
Or, if a tax credit is expected:
Then, when you receive the credit from HMRC
For RDEC claims, the credit is classed as taxable income. The credit can be recognised above-the-line in the accounts, having a positive effect on a company’s pre-tax profit.
You file your R&D tax credit claim via your corporation tax return. There is no standard format for submitting your information, but this guide from HMRC will take you through the process.
Because the SME R&D tax credit scheme is considered notifiable state aid, its use may be restricted if a company has received a grant. There are three different scenarios:
Non-project-specific state aid grants are awarded to a company as a whole, rather than a specific project. But while this offers more flexibility, the downside is that any R&D projects you spend the money on will usually need to be considered under the RDEC scheme for R&D tax credit purposes.
Project-specific notified state aid grants are for a pre-agreed project. This means that only that specific project is considered under the RDEC scheme and any non-grant funded projects can be considered under the SME R&D tax credit scheme.
Non-state aid grants do not affect how a company can claim R&D tax credits for any of the self-funded R&D it undertakes. RDEC can be claimed for the grant portion of the R&D project it’s been allocated to, and SME R&D tax credits can be claimed for the self-funded portion of the project.
You can claim R&D tax relief up to two years after the end of the accounting period it relates to.
To claim the relief, you’ll need to enter your enhanced expenditure into your company tax return form (CT600). To calculate your enhanced expenditure, you will need to:
You can use the online service to send HMRC details to support your claim. You’ll need a Government Gateway user ID and password to log in, and you’ll need certain documents and details, including:
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.
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.
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