Research and Development (R&D) tax credits are a valuable government subsidy that can significantly reduce your company’s tax bill, and even get you some cash back.

Changes to the R&D tax relief schemes

Watch our quick summary of the recent updates

What are R&D Tax Credits?

R&D tax credits are a means of encouraging companies to innovate through a financial reward for developing new technologies to substantially improve products, processes, devices, materials and/or services.

Companies which are eligible for the tax incentives are extremely diverse. We have prepared claims not just for high technology companies in software, aerospace, defence, automotive etc. but also more 'traditional' manufacturing and engineering companies.

Who can claim?

All companies, large and small, can claim if they undertake qualifying work - even if they do not pay corporation tax because they are unprofitable.

There are two schemes under which a claim can be made.

1. Small and medium-sized businesses (SMEs)

The R&D tax credits available to smaller companies have substantially increased in recent years.

From 1 April 2023 a super deduction of 186% (previously 230%) of qualifying expenditure is applied for profitable companies (leading to a tax saving of around 21.5% of the expenditure, in addition to the ‘normal’ tax relief), while loss-making companies can claim a cash payment from HMRC of 18.6% of qualifying expenditure.

For R&D intensive loss-making companies the cash payment which can be claimed from HMRC is circa 27% of qualifying expenditure.

A company can generally claim under this scheme where they have:

less than 500 staff; and either
less than €100 million turnover; or
€86 million gross assets.

If a company meets the above criteria but their R&D is either funded (for example, by grants) or subcontracted to them by third parties, they will most likely need to make a claim under the R&D Expenditure Credits scheme (see below).

2. Research and Development Expenditure Credits (RDEC) scheme

RDEC allows larger companies, and SMEs in certain circumstances, to claim a cash credit against the cost of their qualifying R&D activity.

The credit is recognised in pre-tax profits in the company’s financial statements. From 1 April 2023, the credit rate increased to 20% (from 13%). As with the small scheme, loss-makers are able to claim cash back from HMRC, subject to certain conditions being met.

The RDEC credit is itself subject to corporation tax, so the net ‘post-tax’ cash benefit that it generates is 15% of qualifying R&D expenditure (assuming a 25% tax rate).

Which costs qualify for R&D Tax Credits?

Certain costs incurred in undertaking eligible development work can qualify for enhanced tax relief and credits. These include:

Staffing costs and external workers – for time spent directly and indirectly on R&D.
Consumable items – including power and water costs and consumable materials
Software used for R&D - including cloud computer costs and data licences
Certain payments to sub-contractors/prototype costs.

A claim for R&D tax credits must be made within two years of the end of the year in which the R&D work is undertaken subject to the new claim notification rules.

Where next? Find out where the next stage of your Innovation journey leads.

Innovation

From R&D tax incentive advice to help develop your innovations, to Patent Box tax relief and planning, and independent accountant's reports (IARs), our specialist Innovation tax team can deliver bespoke solutions for your IP-rich business designed to take full advantage of the ever changing opportunities faced by innovative enterprises.

Patent Box

The UK Patent Box regime is a generous tax incentive. It effectively applies a reduced rate of corporation tax on profits arising from patents and patented products, provided that the claimant company has been involved in the development of the patented technology or products and services based on it.

Independent Accountant Reports (IARs)

A grant funding body likes to have some comfort that the grant that it is providing is funding the right expenditure in accordance with the terms of the grant and often requires further review from an independent accountant.

Featured news

Tax update: R&D tax regime - where are we now?

Thursday 21 December 2023

As reported in our last issue of Talking Tax, a number of changes to R&D tax incentives were on the horizon. We recap on the key changes now that the rules have started to bed in, as well as look ahead to an even bigger overhaul from April 2024.

Innovation update: UK is set to re-join the European Commission’s Horizon Europe programme supporting science and research

Thursday 7 September 2023

The UK is set to re-join the European Commission's Horizon Europe programme supporting science and research after a three years hiatus.

Spring Budget 2023: Research and development tax relief updates

Wednesday 15 March 2023

Despite the R&D tax relief rate for SMEs reducing from 130% to 86% in the Autumn Statement in November 2022, from 1 April 2023, HMRC is now proposing that ‘R&D intensive’ loss making companies will be able to surrender losses for tax credits at 14.5% as opposed to the 10% they proposed in the Autumn Statement.

Innovation and Technology update: R&D tax relief reform

Wednesday 8 March 2023

A number of changes to R&D tax relief are due to take effect from April 2023 in one of the biggest shake ups to the regime since its inception.

Tax update: HMRC focus in on irregular R&D tax relief claims

Monday 3 October 2022

R&D tax relief claims have been under increasing scrutiny in recent months as HMRC has looked to clamp down on irregular claims. Just before the summer recess, draft legislation was also published setting out new requirements for businesses claiming under the regime.