Definitive guide to R&D tax credits

Whether your business is big or small, complex or simple, single or multi-site, Source Advisors can manage your R&D tax claim from start to finish. Source Advisors is one of the longest-established innovation tax specialists in the UK, here are some questions that we often get asked about claiming R&D tax relief.

What is R&D tax?

The Research and Development Expenditure Credit (RDEC) is a tax incentive administered by HMRC granted under the Corporation Tax Act 2009, Part 13. This allows UK limited companies to claim a tax credit for activities deemed as research and development.

What else is it referred to?

RDEC succeeded previous versions of the incentive in 2024 and so may still be referenced as R&D tax credits, R&D tax relief, SME R&D tax relief, Large company R&D scheme. From 2024, the unified name is RDEC and is commonly referred to as the new merged scheme. There is also a variation under RDEC called Enhanced R&D Intensive Support (ERIS). To qualify under ERIS, a company must spend at least 30% of its total expenditure on R&D, must be an SME and be loss making in the period. To see which scheme applies to your business use our calculator.

What is the purpose?

The purpose of RDEC is to encourage businesses to invest in innovation by creating or improving products and services that drives economic growth. Based on research conducted by Oxford Economics in 2020, it estimated that £1 of public investment in R&D stimulates an additional £2 of private R&D investment in the long run. This is referred to as additionality. The other commonly cited purpose is to create an economic spillover impact which stimulates new and emerging economic ventures associated to successful R&D.

Types of relief

RDEC is an above the line credit in the profit and loss account, so it acts like income instead of reducing payable taxes. As it is above the line, the credit is then taxed at the prevailing corporation tax rate. The current level of benefit is 20% of the qualifying expenditure.
For businesses that fall under ERIS there is an additional deduction of 86% which increases the effective benefit to 27%. This can be claimed as a payable tax credit which is not liable to tax and is worth up to 14.5% of the surrenderable loss.

What qualifies as R&D?

R&D activity which is known as Qualifying Activity must satisfy the Department of Science, Innovation and Technology (DSIT) Guidelines. They key tests are:

1. Create an Advance – The project must aim to increase overall knowledge or capability in the specific field of science and technology, including pure math, not just the company alone.
2. Overcome Uncertainty – The activity must overcome challenges that are not readily deducible by a competent professional.

Key concepts that build out these tests include:

• Baseline technology – a business must demonstrate what was the known art at the start of the project and why known solutions could not achieve the goal of the project
• Must be a project – there must be evidence of a systematic approach to how a business is trying to overcome the technical uncertainty
• Competent Professional – an individual with the right experience to be able to judge if it was uncertain. This can be through education and experience but must relate to the area of science and technology that is looking to be advanced. A fleeting interest is not strong enough to satisfy an individual as a competent professional.

What costs are eligible?

The costs that relate to the Qualifying Activity are called the Qualifying Expenditure and are made up of:

1. Staff Costs
2. Externally Provided Workers (EPWs)
3. Subcontractor Costs
4. Consumable Items
5. Software Licences
6. Data and Cloud Costs

Only in very limited circumstances can overseas costs of third parties (EPWs and Subcontractors) of any kind be included in the claim. To include overseas costs three conditions must be satisfied:

1. 1. Conditions necessary for the R&D are not present in the UK
   2. Conditions necessary are present in the location where the R&D is done
   3. It would be ‘wholly unreasonable’ to replicate the conditions in the UK.

Availability and costs of resource are not justifications to include overseas costs.

How to claim

A claim for RDEC is made via the CT600 and CT600L supplementary form and must include the submission of an Additional information Form detailing the R&D projects.

Are there key deadlines?

There is a strict deadline of 2 years from the end of the accounting period in which you can make a claim. If it is your first time claiming, or depending on how you have claimed previously, you may need to submit a Claim Notification Form.

If you have any further questions please contact our experts who will be happy to help.