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R&D tax credits

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What are R&D tax credits?

In the UK companies are able to claim tax relief for their R&D activity. This government incentive is designed to boost innovation by supporting businesses that seek to improve or overcome challenges and uncertainties in their products and processes. This scheme is administered by HMRC.

How do R&D tax credits work?

In the UK, companies can claim tax relief for their qualifying R&D activity where it creates an appreciable advance compared to what was already in place.

Areas of activity may include:

  • Making new products or solutions
  • Improving processes, services or materials – beyond what is considered the normal course of business
  • Significant levels of testing that is more than trial and error
  • Develop software solutions that improves on the current state of play
  • Investment in failed projects or developed products that were never launched

Companies claim R&D relief by entering the total qualifying expenditure on the full Company Tax Return form, CT600. Tax relief is given as either a reduction in the tax liability or, if the company is loss making, a refundable tax credit payable as cash on the amount of qualifying R&D expenditure.

Check if your R&D costs qualify

For tax purposes, R&D takes place when a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology. You can claim against certain costs that are allowable for tax purposes on the project including: Employment costs to the company including salaries, bonuses, some reimbursed costs, employers Class 1 National Insurance contributions, employers pension fund contributions
  • Subcontractor costs (certain restrictions apply if you are claiming under the RDEC scheme)
  • Externally Provided Workers (EPWs)
  • Software (revenue costs)
  • Consumable items including materials and utilities like light and heat
  • Clinical trials volunteers in the pharmaceutical industry
  • Data licenses
  • Cloud computing
We find that companies from many sectors and industries have the potential to claim UK R&D tax relief. The notion that R&D is about laboratories and white coats is just too limiting. The definition of R&D for tax purposes is so much broader.

New merged R&D expenditure credit (RDEC)

The new merged R&D expenditure credit (RDEC) scheme, which merges the previous SME and RDEC schemes, will apply for accounting periods starting on or after 1 April 2024. It does not discriminate based on the size of the business, both SMEs and large businesses will claim under the same scheme and at the same above-the-line credit rate of 20%.

The merged scheme continues with largely the same assessment criteria, to have a qualifying R&D project the project must satisfy three conditions:

  1. The project must have achieved, or is seeking to achieve, an advance in the overall knowledge or capability of a field of science and technology.
  2. There must have been a scientific or technological uncertainty.
  3. It must not be readily deducible to a competent professional working in the field to carry out the work.

The HMRC guidance for the new merged RDEC scheme will impact companies in different ways. Particular areas of change include:

  • Rules of subsidisation
  • Overseas restrictions
  • Contracted out R&D rules (subcontractor rules)
New merged scheme

Enhanced rate for R&D intensive SMEs

Against a concern that the merged scheme could negatively impact the most innovative SMEs, there is a second ‘scheme’ or ‘rate’ for loss-making R&D intensive businesses, called the Enhanced R&D Intensive Support (ERIS) scheme. The ERIS scheme applies, with the merged R&D expenditure credit, for accounting periods beginning on or after 1 April 2024. The ERIS rate equates to a credit rate of up to 27% and an ‘intensive’ SME is defined as an SME whose qualifying R&D expenditure represents 30% or more of their total expenditure..
Enhanced R&D Support scheme

Claim under the previous RDEC scheme

The Research and Development Expenditure Credit (RDEC) is given as a taxable credit on the amount of qualifying R&D expenditure payable as cash or as an offset against the company’s Corporation Tax liabilities. Therefore, it applies whether your company is making a profit or a loss.

For accounting periods starting on or after 1 April 2024, the RDEC scheme will continue as a merged, single R&D scheme for large businesses and SMEs. At that point, the notional tax rate applied to loss-making companies will be 19%.

Claim under the previous SME scheme

UK limited companies that are subject to UK corporation tax may be able to qualify for the SME scheme. You are classed as a small or medium sized enterprise (SME) if you, and your connected companies, employ fewer than 500 employees with either an annual turnover under €100 million or a balance sheet under €86 million. A company does not have to be paying corporation tax it can be in a loss position and still make a claim. For accounting periods beginning on or after 1 April 2024, the new merged RDEC scheme will apply. However, the ERIS credit rate of up to 27%  could apply to an ‘intensive’ SME. This is defined as an SME whose qualifying R&D expenditure represents 30% or more of their total expenditure.

your R&D tax relief rate

There has been a raft of rule and rate changes that have impacted R&D tax relief. Our easy-to-use calculator will estimate your rate with answers to a few simple questions.

Calculate your R&D tax relief rate ​today

What is an R&D tax credit HMRC enquiry?

In a small, but growing, number of R&D tax relief claims HMRC will ask for more information and an enquiry is raised. An inspector will ask questions to better understand the R&D and the costs claimed. If you have a robust claim then this should withstand this extra scrutiny and you or your advisor should be able to answer HMRC’s questions. But if not then it can affect the value of your claim and in some cases, penalties are applied. An enquiry might mean your R&D tax relief may be delayed but HMRC can raise an enquiry even if you have received the benefit.
HMRC R&D enquiry support

Why choose Source Advisors?

We match you with an industry, commercial, or technical expert that best suits your business. Irrespective of size and complexity, we will find the right technical expert who can add the most value to your claim. We work alongside your accountant to complement their skills so there is no conflict. Your relationship with your accountant won’t be adversely affected.
Source Advisors team

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