UK
IRE
AU
CA
US
ZA
NGExpert financial copywriter
An R&D tax credit is a cash payment from the government to encourage companies to conduct Research & Development other innovative activities.
6-8% of your qualifying R&D for SME R&D tax relief
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 the definition is broad and includes investment into technology, IT systems, data and cloud computing. The range of businesses carrying out qualifying activity is ever expanding. Various events over the last two years, notably COVID-19, has 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."
Register your business with Swoop for access to tailored funding and savings opportunities
The Swoop platform has over 100 business grant options for US SMEs of different sizes and sectors – check your eligibility and apply quickly and easily.
Page written by Rachel Wait. Last reviewed on August 6, 2024. Next review due October 1, 2025.
Research and development 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.
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, or a theoretical field such as pure maths.
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.
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.
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 33%.
 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 33%.
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 US 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 IRS
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 the IRS 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 complete form 6765. To calculate your enhanced expenditure, you will need to:
You can use the online service to send the IRS details to support your claim. You’ll need certain documents and details, including:
US 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 US 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 US.
If you’re a startup, and you’re eligible, you’ll be able to claim R&D tax credits. Â
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. Â
R&D tax credits were introduced by the US government in 1981 as part of the Economic Recovery Tax Act.
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.
If you’re a startup, and you’re eligible, you’ll be able to claim R&D tax credits. Â
Written by
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.
Swoop promise
At Swoop we want to make it easy for SMEs to understand the sometimes overwhelming world of business finance and insurance. Our goal is simple – to distill complex topics, unravel jargon, offer transparent and impartial information, and empower businesses to make smart financial decisions with confidence.
Find out more about Swoop’s editorial principles by reading our editorial policy.
yet? Register here!