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.
How does R&D tax relief work?
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:
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.
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How much can I claim for R&D?
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:
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.
When the R&D expenditure occurred
The additional deduction rate
Before 1st April 2023
1st April 2023 onwards
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.
When the R&D expenditure occurred
The percentage of your R&D spending you can receive as a credit against your tax bill
1st April 2015 – 31st December 2017
1st January 2018 – 31st March 2020
1st April 2020 – 31st March 2023
1st April 2023 onwards
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.
What R&D costs can I claim for?
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:
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.
Is there a deadline for claiming R&D tax credit relief?
You can claim tax relief on R&D up to two years after the end of the accounting period that the claim relates to.
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.
How do I apply for R&D tax relief?
The process for making a claim for R&D tax relief is different for accounting periods starting on or after 1st April 2023.
You may need to submit a Claim Notification form for your R&D claim to be valid.
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.
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
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