Research and development (R&D) tax credits are a tax relief based on your company’s investment in innovative technology
- Research and development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation.
- The merged scheme replaces the old SME and RDEC tax relief schemes.
- Qualifying expenditure includes staffing costs, software, consumables and payments to clinical trial volunteers.
- To be eligible for R&D tax credits, you must meet the government’s criteria, which changed in April 2024.
We’ll be walking you through what a tax credit is, how it could benefit your business, and how to claim.
What is an R&D credit?
Research and development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation. They are a valuable source of cash for business to invest in accelerating their R&D, hiring new talent, and ultimately transform your business. The government benefits from increased productivity which impacts the economy and can effect positive change on a global scale.
Businesses that spend money developing new products, processes, or services, or enhancing existing processes are eligible for R&D tax relief. If you are spending money on innovation, you can make an R&D tax credit claim to receive either a cash payment or corporation tax reduction. If you are making a claim for the first time, you can claim R&D tax relief for your previous two completed accounting periods.
The merged scheme
The merged scheme combines and replaces the old SME and RDEC tax relief schemes and came into being in April 2024. It’s now the main R&D scheme for businesses of all sizes. It exists alongside an enhanced support for loss-making R&D-intensive companies (ERIS). Know that the qualifying expenditure for the two new schemes are identical but the calculation of the credit amount is different.
Under the merged scheme, credits for all companies will be offset against the company’s corporation tax liability. However, in the case where all corporation tax liabilities are met, what’s left over will be paid in cash to your business. The rate of expenditure under the merged scheme is 20%.
However, enhanced R&D lets loss-making R&D SMEs deduct an extra 86% in their qualifying costs when adjusting for trading loss, as well as the 100% deduction which already appears in the accounts, totalling a sizeable 186% deduction.
You can also claim a payable tax credit (which is not liable to tax) and is worth up to 14.5% of the surrenderable loss.
It’s possible to claim under ERIS if you meet ‘the intensity condition’. This means that the business is:
- Claiming for an accounting period on or after April 2024
- Relevant R&D expenditure makes up at least 30% of total expenditure
What counts as qualifying expenditure?
The project must relate to your company’s trade – either an existing one, or one that you intend to start up based on the results of the R&D. Your innovation project must aim to create an advancement in the overall field, not just for your business, which means an advance cannot just be an existing technology that has been used for the first time in your sector.
Qualifying expenditure for a project could be:
Staffing costs. This includes salary, pension contributions and employer National Insurance, determined by the time spent on R&D activities, so it’s helpful to keep a record of these times. External staff and R&D subcontractors may be covered, but with restrictions.
Software used for R&D. Includes data licences and cloud computing.
Consumables used in R&D. Though it’s a confusing term, ‘consumables’ means items bought and used for an R&D project. Think hardware and materials, plus the energy directly used for the R&D.
Contribution to independent research. Third parties doing research on your behalf qualify. A qualifying body must be a charity, a higher education authority or a named scientific research body.
Payments to clinical trial volunteers. The scheme covers the cost of attracting and paying clinical trial participants.
The things that wouldn’t usually count as qualifying expenditure are rental costs, overheads, legal costs, overseas contractor work and production costs.
>See also: Why small businesses are missing out on millions in R&D tax credit relief
How do R&D tax credits work?
R&D reliefs provide financial assistance via the claiming company’s corporation tax calculation. The scheme is structured in a way that both profitable and loss-making companies may benefit by making a claim.
For profitable businesses, the benefit is achieved through a reduction in their tax liability, for historic years this results in a repayment of overpaid tax.
For companies at a loss, the R&D claim will increase the loss arising. This can then be set against prior and future profits of the company. Alternatively, the loss attributable to the R&D activity can be surrendered to HMRC in turn for a cash payment.
Various categories of costs qualify for R&D tax relief. Once costs have been allocated to a specific project the total of the costs is then multiplied by the relevant R&D regime relief, determined by the business size and funding of the project.
>See also: How my business benefited from R&D tax relief and EIS
How do I claim an R&D tax credit?
To be eligible for R&D tax credits, it is essential to understand and meet the necessary criteria as outlined by the UK government.
If your claim covers a period of over 12 months, then you must file a separate claim for each accounting period. The deadline for a period of account:
- That’s 18 months long or less is 24 months from the last day of the period of account
- That’s more than 18 months long is 42 months from the first day of the period of account
You will be claiming credits alongside your corporation tax return. How you make your application depends on the type of R&D claim that you’re making.
Merged scheme
- Show the expenditure credit as a taxable income in your profit and loss account, or you could add it to your profit through your tax computations.
- Put a cross (X) in the 656 box to inform HMRC that you’ve submitted the claim notification form.
- Put a cross (X) in the 657 box to say that you’ve submitted the additional information form.
- Remember your bank details so that HMRC can pay you.
- Finally, fill out the supplementary form CT600L.
- Finish up your tax computations and include the additional deduction in calculating your adjusted trading profit and loss. If you’ve given up losses for a payable tax credit, do not include this in your loss carry forward figure.
- Put a cross (X) in the 656 box to inform HMRC that you’ve submitted the claim notification form.
- Put a cross (X) in the 657 box to say that you’ve submitted the additional information form.
- Fill out the supplementary form CT600L if you’re claiming a payable tax credit.
For more information you should speak to specialist R&D tax credit advisors such as ourselves.
R&D tax credits are a reward for companies who invest in tech or scientific development in the wider field, not just your own business. Credits usually come in the form of reduced corporation tax or direct cash payments.
You can if you’re a limited company and your project seeks an advance in a field of science or technology. These advances could be creating a new process, model, material, product or service. Alternatively, it could be improving a process, mode, material, product or service in a significant way.
You must follow the government’s guidelines while submitting your technical report and qualifying expenditure data. You must submit it with your corporation tax return (CT600).
You’re able claim back R&D tax credits up to two years (24 months) from the end of the accounting period in which your qualify project took place.
Martin Sharkey is head of consulting Leyton UK.