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

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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.

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Content image: /uploads/team/unknown.jpg David Clift
David Clift
Partner, Innovation Taxes
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Content image: /uploads/team/unknown.jpg Jemma Vaughan
Jemma Vaughan
Partner, Innovation Taxes
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Content image: /uploads/team/unknown.jpg Rebecca Wass
Rebecca Wass
Director, Innovation Taxes
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