R&D tax credits UK

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.

Amount

Amount

18.6% of your qualifying R&D for SME R&D tax relief and 12% for RDEC

Purpose

Purpose

Government tax relief to encourage R&D

Speed

Speed

Receive cash 4-8 weeks after filing your claim for tax credits

Suitable for

Suitable for

Limited companies carrying out R&D in science and technology (including IT – it’s a broad definition)

Cost

Cost

Varies depending on the size of your claim

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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.

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Andrea Reynolds, Swoop’s CEO & Co-Founder
Andrea Reynolds
Swoop’s CEO & Co-Founder

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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R&D tax credits calculator - how much could you receive?

Think you could be eligible for R&D tax credits? Use our simple calculator to see how much you could receive to offset your tax liability, or even as a cash refund.

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Rachel Wait

Page written by Rachel Wait. Last reviewed on February 9, 2024. Next review due April 6, 2025.

What is research & development (R&D)?

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:

  • looked for an advance in science and technology
  • had to overcome scientific or technological uncertainty
  • overcame this uncertainty
  • could not easily be worked out by a professional in the field

What is an R&D tax credit?

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.

How do R&D tax credits work?

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:

  • deduct an extra 86% of their qualifying costs from their annual profit, as well as the normal 100% deduction, to make a total deduction of 186%
  • claim a tax credit if the business is loss making, worth up to 10% of the loss surrendered (the surrender rate).

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.

Read more: find out how the SME R&D tax credit and RDEC schemes are merging.

What are the benefits?

The main benefits of R&D tax credits include:

  • You can claim for a wide range of costs
  • There is no minimum amount that must be spent on qualifying R&D projects to be able to claim
  • Providing your company meets the eligibility criteria, it doesn’t matter what sector or industry your business is in
  • Your business can still make an R&D tax credit claim even if it is not profitable

How are R&D tax credits calculated?

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.

Does my business qualify for R&D tax credits?

Research and development can take place in any sector, so any of the following could qualify:

  • Architects
  • Engineers
  • Agricilture
  • Construction
  • Cloud computing
  • The food industry.

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.

What activities qualify for R&D tax credits?

Qualifying expenditure for R&D includes:

  • Employee costs including salaries, wages, Class 1 National Insurance Contributions and pension fund contributions
  • Subcontractors – you can claim 65% of the relevant costs
  • External workers
  • Consumables, such as water, light and heat
  • Software
  • Clinical trial volunteers.

How much can my business claim?

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%.

R&D tax credits rates

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.

An example

Example 1: Profitable SME

Calculations£
Profit£200,000
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

Calculations£
Loss£200,000
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

Accounting treatment for R&D tax credits

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):

  • Debit corporation tax charge (profit-and-loss statement)
  • Credit corporation tax (balance sheet)

To reduce your company’s tax charge to reflect your R&D claim:

  • Debit corporation tax (balance sheet)
  • Credit corporation tax charge (profit-and-loss statement)

Then, when a company receives a tax refund:

  • Debit bank (balance sheet)
  • Credit corporation tax (balance sheet)

Or, if a tax credit is expected:

  • Debit corporation tax (balance sheet)
  • Credit corporation tax charge (income statement)

Then, when you receive the credit from HMRC

  • Debit bank (balance sheet)
  • Credit corporation tax (balance sheet)

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.

R&D tax credit template

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.

R&D tax credits and grants

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:

 

  1. Non-project-specific notified state aid

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.

 

  1. Project-specific notified state aid

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.

 

  1. De minimis and other non-state aid

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.

How do I make a claim?

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:

  • 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 computations
  • Add this to the original R&D expenditure figure to get the enhanced figure which you can enter into your tax return

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:

  • The start and end dates of the accounting period relating to the R&D activity
  • Your 10-digit company unique tax reference (UTR) number
  • The total amount of tax relief you’re claiming
  • A breakdown of your qualifying R&D costs
  • Your unrelieved trading loss for the claim period.

Frequently asked questions

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.

 

Written by

Rachel Wait

Rachel has been writing about finance and consumer affairs for over a decade, helping people to get to grips with their finances and cut through the jargon. She's written for a range of websites and national newspapers including MoneySuperMarket, Money to the Masses, Forbes UK, and Mail on Sunday. Rachel has covered almost every financial topic, from car insurance and credit cards, to business bank accounts and mortgages.

To read our editorial policy, please click here.

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