Limited companies involved in research and development (R&D) activities may be able to claim different types of tax relief against their Corporation Tax bill.

You may be able to claim tax relief against your bill for Corporation Tax if your company spends money on research and development, such as creating new products, services, or processes – or enhancing existing ones.

The great thing about R&D tax relief is that any UK company of any size can claim. It doesn’t even matter if the R&D project itself ultimately failed in its objectives, or if the company makes a loss. The main thing is that qualifying R&D work was undertaken, and that the business is a limited company registered for Corporation Tax.

A successful R&D claim for profit-making companies will be applied as a credit against your bill for Corporation Tax, reducing the amount you need to pay. Loss-making organisations can receive cash payments instead.

The R&D tax relief system currently operates as two schemes, though these will be merged into one single scheme from April 2024 onwards. To claim for accounting periods before then, you can use either the:

• SME scheme
• Research and Development Expenditure Credit (RDEC) scheme

What’s the difference between RDEC and SME R&D?

The SME scheme is aimed at smaller businesses whose limited funding might mean they need a bit more financial support to carry out R&D activities. As such, the maximum rate of relief available through the SME R&D scheme is higher than what’s available through the RDEC scheme, which is aimed at larger, more established companies.

The other crucial difference between the two is the way in which they’re accounted for in your bookkeeping.

The RDEC scheme is what’s known as an ‘above the line’ scheme, so any tax credit you receive will be shown as a source of income and therefore subject to Corporation Tax. The SME scheme is ‘below the line’.

Which R&D scheme do I qualify for?

Until the schemes merge for periods from April 2024, you will qualify for SME R&D tax relief if your company:

• Employs fewer than 500 people
• Has a balance sheet of under €86 million, or an annual turnover below €100 million

You’ll need to apply using RDEC if your company exceeds these figures, or has received certain notified state aid.
 

Whilst the schemes are still separate, the amount of tax relief that you can claim on your company’s R&D activities depends on whether you qualify for the SME scheme, or for the Research and Development Expenditure Credit (RDEC) scheme.

What you can claim through the SME scheme

The SME scheme allows companies to claim tax relief on R&D using an ‘additional deduction rate’. This means that you can:

• Deduct 100% of the amount which you spend on R&D (like you would when claiming allowable expenses)
• And then deduct a percentage of that amount again

For example, the additional deduction rate from 1st April 2023 is 86%. A company with spending that qualifies for R&D relief can deduct 100% of the amount from its profits, and then deduct a further 86% of the amount, to make a total 186% deduction.
 

Additional R&D relief for research intensive small businesses

Small companies may be able to claim an additional 10% cash credit (from 1st April 2023 onwards) if they make a loss, but are considered to be ‘research intensive’.

What is a ‘research intensive’ business?

Your company may be considered ‘research intensive’ if it’s an SME, and the amount it spends on R&D activities accounts for a sizeable chunk of its total spending. To qualify, the percentage of your spending which relates to R&D must be:

• 40% or more for claims in accounting periods up until 31st March 2024
• 30% or more for accounting periods that start 1st April 2024 onwards

There will also be a grace period allowing companies to continue receiving relief for one year if their R&D spending dips below the 30% threshold.

Claiming through the RDEC scheme

Research and Development Expenditure Credit (RDEC) is a tax credit applied against the company’s tax bill. The expenditure credit rate is worked out as a percentage of what you spend on R&D.
 

 
For example, if you spend £100,000 on R&D between 1st April 2023 and 31st March 2024, you can claim 20% of it back – which is £20,000.

Just remember that RDEC is an above-the-line credit. ‘Above the line’ means that the credit is accounted for in your bookkeeping as if it were income – a bit like a grant – so you’ll pay Corporation Tax on it.

The scope of eligible projects and costs is huge, spanning just about every industry. The key thing here is that your innovation must have involved some kind of scientific or technical uncertainty. It should also benefit the wider field in which your company operates, not just your company itself.

Each R&D project is unique and so are the eligible costs. However, as a guide these are the most common ones for inclusion:

• Staff wages, overtime payments and salaries
• Employer NIC contributions
• Costs relating to subcontractors, freelancers and externally provided workers (EPWs)
• Payments made to volunteers for any clinical trials
• Certain types of software (which were specifically designed for the R&D project itself, not bought ‘off the shelf’)
• Consumables (including heat, electricity, and water)

Bear in mind this isn’t an exhaustive list, which is why it’s well worth seeking advice if you’re thinking of starting an R&D tax relief claim. Innovative companies working in creative industries may also be able to claim creative sector tax reliefs too.

Can I still claim R&D tax relief if the project is unsuccessful?

Yes, even if the project ultimately fails, you can still claim tax relief on behalf of the research and innovation that went into the developmental process.

Cloud, data, and mathematics

From 1st April 2023, specific costs around licensing datasets and cloud computing solutions can be included in a claim for R&D tax relief. These costs still have to relate directly to solving a technical or scientific uncertainty!

If your cloud computing service or dataset will be used for work unrelated to the R&D project, you can apply a reasonable proportion as a percentage when making your claim. You’ll also be able to include data licensing fees unless you’re allowed to publish the data, or share or sell it to a third party.

Relief for overseas EPW and subcontractor costs will be removed

In most cases you won’t be able to claim for R&D work done by externally provided workers or subcontractors located abroad after 1st April 2024.

There are some exceptions though, and you may still be able to claim tax relief if the work being done by the overseas EPW or subcontractor is classed as ‘qualifying overseas expenditure’ (QOE). For example, if it was unreasonable for the R&D work to be undertaken in the UK. HMRC use the example of placing sensors on a volcano.

 
For example, the deadline to submit an R&D tax credit claim for an accounting period which runs from 1st April 2022 to 31st March 2023 is midnight on 31st March 2025.

The process for making a claim for R&D tax relief is different for accounting periods starting on or after 1st April 2023.

 
The Claim Notification for R&D is basically a pre-notification which tells HMRC you plan to make a claim for R&D for that accounting period. If this is your first-time claiming R&D relief, or if you haven’t submitted a claim for R&D in the last three years, you’ll need to use a digital service to pre-notify HMRC that you plan to claim.

The Claim Notification can be sent from the first day of the accounting period that it relates to, but the deadline to submit is 6 months from the end of the period. You can enter the details of any qualifying R&D expenditure into your Company Tax Return.

If you operate multiple companies, or you’re working with various partners, it’s essential that the UTR number and accounting period details on your Claim Notification are the same as on your CT600 Company Tax Return.

What you need for an R&D claim

The Corporate Intangibles Research and Development (CIRD) Manual is a good place to start, because it sets out the general rules and eligibility around R&D tax relief.

Explaining the project

Your claim must describe the project and its associated costs in a way which makes it clear why you’re claiming R&D relief. Describe why the specific challenges faced in a particular field led to the work being undertaken, and how the project attempted to overcome these challenges and uncertainties.

You must also include the contact details of the main person leading the R&D project, along with the details of any professional firms or individuals who helped you prepare your R&D claim. You’ll also need to detail how many externally provided workers were involved in the R&D project, together with their PAYE scheme reference numbers.

From April 2023 onwards it’s a requirement to provide a complete breakdown of eligible project costs under the following headings:

• Cloud computing services and data licences
• Contributions to independent R&D
• Correct SIC code
• What costs are the result of eligible indirect activities
• How many projects make up your claim

Learn more about our online accounting services for businesses. Call 020 3355 4047 to chat to the team, and get an instant online quote.