Source Advisors Logo

​Reviewed by Clive Flood, Chief Operating Officer | 1 February 2024.

Definitive guide to R&D tax credits

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 an R&D tax credit?

Research and Development (R&D) tax credits are a tax relief or credit granted under the Corporation Tax Act 2019 and guidance given under CIRD80000. It allows UK Ltd companies to claim a tax credit based on the level of expenditure that is associated to R&D.

What costs and expenditure qualify for R&D tax credits?

Qualifying expenditure for R&D includes:

    1. Salaries including pension and bonuses
    2. Subcontractors (restrictions apply under the RDEC scheme)
    3. Externally provided workers
    4. Consumables including relevant software licences
    5. Heat, light, and power
    6. Clinical Trials
    7. Data licences (For full accounting periods starting on or after 1 April 2023)
    8. Cloud computing (For full accounting periods starting on or after 1 April 2023)

    The level of cost depends on the amount of R&D activity that can be identified. This is a broad subject and includes various members of staff from skilled engineers, software architects to management and support staff.

    What activities qualify for R&D tax credits?

    R&D activities relate to activities or projects that are focused on creating a level of improvement or advancement. These are not routine and must have an element of technical uncertainty where the answer or solution is not obvious or easily obtainable.

    Can I claim R&D tax credits?

    A UK registered company can make an R&D tax claim. There is no requirement to be paying corporation tax, just be liable for tax in the event that you are profit-making. Broadly speaking if you are loss-making, you can convert the tax credit to be a cash benefit to the business. If you are making profit, you can offset the credit against your tax liability.

    How do R&D tax credits work?

    You make a claim directly to HMRC with a summary of the costs associated with the R&D in the business along with a technical description of the work carried out.

    Who qualifies for R&D tax credits?

    Many companies in the UK qualify for R&D tax credits under the SME or RDEC scheme. Find out more here.

    How much is the R&D tax credit?

    The average R&D tax benefit claim in the UK for 2021-22 is projected to be £84,000. This ranges from a few thousand to millions of pounds.

    Do R&D tax credits count as state aid?

    Under the SME scheme, R&D tax credits will count towards state aid, but not under the RDEC scheme.

    Can I make an R&D tax credit claim if I have a grant?

    If your business has received a grant, an R&D claim can still be made. It is likely to impact the value of the claim as it is likely that if you are an SME, the project that the grant is based on will then fall into the RDEC scheme which is not as advantageous.

    Does software development qualify for R&D credit?

    Most companies will now have a level of software development and it can be considered as qualified expenditure for R&D tax credits. The tests of advancement overcoming challenges and the answer not readily deductible still apply. It is becoming increasingly more challenging to separate routine software development from qualifying development for tax purposes and why the use of a specialist company who understands both the technical specifics of the industry as well as the legislation is more imperative now than ever before.

    Can I capitalise R&D spend and still make an R&D tax credit claim?

    If you have capitalised the R&D costs as an intangible fixed asset, an R&D tax credit claim can still be made against those costs that qualify. If they have been capitalised as a fixed asset, they cannot be considered for a tax credit but can benefit from Research and Development allowances.

    What are Research and Development Capital Allowances?

    Research and Development Allowances (RDAs) provide a tax deduction on a company’s capital expenditure that is associated to R&D activity. It provides a 100% deduction for tax purposes and has a wider scope for qualifying costs than standard capital allowances.

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

From the Knowledge hub

Contact us to find out how you can make the most of your claim

Welcome to our new website. GovGrant is now known as Source Advisors. To find out more click here