Our guide to R&D tax credits

R&D tax credits encourage innovation projects in the UK by providing valuable financial support. But to qualify, you must meet a wide range of detailed criteria to prove your project is working towards a genuine innovation.

New HMRC data shows the total R&D support claimed in 2017/18 was £5.1 billion, up 15% from the previous year.

But other reports suggest many companies are still missing out on these credits because they don’t know what is on offer or don’t understand them.

What are research and development tax credits?

R&D tax reliefs offer a significant boost to companies that work on innovative projects in science and technology. To claim them, you must be aiming to research or develop an advance in your field. You can even claim relief on unsuccessful projects.

How to qualify for R&D tax credits

Judging which projects and activities qualify for R&D tax relief is usually where most companies seek help. Experience has shown they can benefit from HMRC’s early involvement. The advance assurance scheme, which guarantees relief for three accounting periods, can also help.

Firstly, your work must be part of a specific project aiming to make an advance in science or technology. It cannot be in a social science, like economics; or a theoretical field, such as pure maths.

The project must relate to the work of your existing company, or one you intend to start based on your R&D results. You need to explain how your project sought an advance via a new process, product or service; or improving an existing one. But this must be an advance in its overall field, not just for your business.

It can be an advance developed by another company where the solution is not known publicly. But it cannot simply be an existing technology applied for the first time in your sector. Make sure there is no current solution and that no-one in your company knows how to achieve the advance before the project starts.

To qualify, you must also explain the ‘uncertainty’ you wish to solve. HMRC requires detailed proof of this uncertainty, which is explained in Making R&D easier for small companies.

What period to claim for

You can claim from the time you begin working to resolve the uncertainty until you solve or stop working on it. The period should end once you have a working prototype device, product or process that solves the problem ready - and before you go into production.

You can claim up to two years after the accounting period the claim relates to. If you find another uncertainty after starting production, you can claim for another period of R&D while resolving it.

The types of relief available depend on your company’s size and whether the project has been subcontracted to you or not.

Small and medium sized enterprises (SME) R&D tax relief

You can claim SME R&D relief if you have less than 500 personnel, a turnover of under 100 million euros, or a balance sheet total under 86 million euros.

This relief allows companies to deduct an extra 130% of qualifying costs from annual profit, in addition to the normal 100% deduction, to make a total 230% deduction. If you are making a loss, you can claim a tax credit, worth up to 14.5% of the surrenderable loss.

SMEs making their first R&D claim can get advance assurance. If granted, this guarantees acceptance of any R&D relief claims in the first three accounting periods, if they follow what was agreed.

How to calculate and claim SME R&D relief

To calculate your enhanced expenditure:

• work out the costs attributable directly to R&D

• reduce any subcontractor or external staff payments to 65%

• add all costs together, then multiply by 130%

• add this to your original R&D expenditure figure to get your enhanced expenditure.

To claim, enter the enhanced figure on your tax return.

If you are making a loss, you can surrender this and claim a tax credit. The corporate intangibles R&D manual explains how to convert tax relief into credits.

R&D expenditure credit for large companies

Large companies can claim an R&D expenditure credit (RDEC) for projects. SMEs and large companies subcontracted for R&D work by a large company can also claim this.

The RDEC was 12% of your company’s qualifying R&D expenditure from 1 January 2018 to 31 March 2020 – and increased to 13% from 1 April 2020.

The credit is taxable and, if the company has any outstanding liabilities such as corporation tax or PAYE, the RDEC is used to pay that liability. If there are no outstanding liabilities, the RDEC - or what remains of it after discharging liabilities - is paid to you in cash.

What can you claim RDEC on?

For personnel working directly on the R&D project, you can claim a proportion of wages, national insurance contributions, and pension fund contributions equal to the percentage of time they spend on the project.

You cannot claim for maintenance or clerical work, such as managing payroll, that would have been done anyway. You can claim 65% of relevant payments to an external agency if they provide staff for the project.

You can claim for all consumable items used in the R&D. You cannot claim for the costs of producing and distributing goods and services; capital expenditure; land; patents and trademarks; rent; or rates.

How to calculate and claim RDEC

To calculate your expenditure, you need to:

• work out the costs attributable directly to R&D

• reduce relevant subcontractor or external staff payments to 65%

• add all costs together and multiply that by 12% to get the expenditure credit, or 13% for projects that started after 1 April 2020

• input this figure on your full company tax return, claiming separately for each accounting period.

For companies of all sizes, it’s advisable to use an accountant or a specialist tax advisor to help you prepare and submit your R&D tax relief claims.

The content on our site is provided for general information only. Obtain specialist advice before taking, or refraining from, any action on the basis of the content on our site.