R&D Tax Relief explained
What is R&D tax relief
R&D tax relief has been available for over twenty years. It was first introduced in 2000 by the Government as a way to promote innovation in the UK and stimulate the economy.
The relief is run by HMRC and allows companies that are investing in projects to develop new products, processes, or services (the improvement of existing products, processes, and services also qualifies!) to receive a reduction of their corporation tax bill or a rebate.
This incentive can provide companies with vital funds to invest in further innovation to gain a competitive advantage and grow.
If your new to Tax relief then there are probably lots of question you need answering. We’ve put together a collection of our most asked questions to help you start your journey. Don’t forget you can contact us to book a call with one of our team to discuss your specific claim and answer any outstanding questions.
-
HMRC defines R&D for tax purposes as follows:
“R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology.
The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.
Certain qualifying indirect activities related to the project are also R&D. Activities other than qualifying indirect activities which do not directly contribute to the resolution of the project’s scientific or technological uncertainty are not R&D.”
This is the most recent definition provided by HMRC, available on the GOV.UK website under Guidelines on the meaning of research and development for tax purposes.
-
Businesses investing in the development of novel products, processes, services, or enhancing existing ones, could qualify for R&D tax relief. If your project aims to fundamentally improve the underlying state of technology in your industry, you could be eligible to submit an R&D tax relief application and receive a reduction in your Corporation Tax bill or cash into your business.
If you claim R&D for the first time, you are allowed to look back at eligible costs incurred during the last two financial years that are related to your R&D projects.
-
As long as a project meets the eligibility criteria, companies from any industry could potentially benefit from R&D tax relief. However, there are a few exceptions:
R&D tax relief can’t be claimed if the advance in science and technology takes place in the fields of:
Arts
Humanities
Social sciences (including economics)
-
To receive R&D tax relief you must:
Be a UK Limited company eligible to pay corporation tax.
Have undertaken eligible R&D activities.
Have invested time and money on these activities.
-
As per HMRC’s guidelines, a qualifying R&D project needs to seek an advance in science or technology. This means that the goal must be to develop a new to-market solution, or one better than what is already available. However, this alone isn’t enough to meet HMRC’s criteria. Technological uncertainty must also be faced during the development process.
The process behind the realisation of the project’s outcome cannot be common knowledge in the industry and readily deducible by someone with relevant experience. Put simply, it can’t be obvious how to solve the problem.
When trial and error occurs, and several iterations of prototypes are required, it is likely that technological uncertainty was faced.
-
R&D costs can be broadly broken down into four categories:
Staff time that is spent both directly and indirectly on R&D is typically one of the most significant areas of recovery, and is mainly quantified through salary costs.
Software that is used for R&D, as well as software that indirectly contributes to the R&D activity, can be recovered.
Consumables are anything that is consumed, altered, modified or destroyed within the process of conducting R&D. This can be materials or utilities, like heat, light and power.
Third Parties are people who you pay to do R&D that are not on your payroll, such as other companies, technical consultants and agency staff; generally, you only get 65% of these costs as qualifying expenditure,
-
The benefit you will receive is determined by how much you spend on R&D. To roughly estimate your benefit, you identify your qualifying expenses and then increase them by the relevant rate (explained below).
Your benefit can materialise in different forms based on your specific circumstances:
- A reduction in Corporation Tax if you're making a profit.
- A cash credit if you're not making a profit.
Or sometimes, you might get a mix of both benefits.
Is there more than one R&D incentive?
For accounting periods prior to 1st April 2024, there are two incentives that companies can claim based on specific criteria.
SME incentive
A company is eligible under the SME incentive if it:
Has fewer than 500 staff
Turnovers less than €100m or has less than €86m total assets on the balance sheet.
RDEC incentive
A company qualifies under the RDEC scheme if it:
Doesn’t meet the criteria of the SME R&D tax credit scheme
Meets the criteria for the SME R&D tax credit scheme but has been in receipt of notifiable state aid.
Starting from accounting periods beginning on or after 1st April 2024, the RDEC and SME schemes have been merged into one consolidated framework with a single set of qualifying rules.
The Merged R&D Scheme Explained
For accounting periods beginning on or after 1st April 2024, the Merged Scheme will replace SME and RDEC schemes, changing how companies claim R&D tax relief.
This is an overview of the recovery rates under the different R&D incentives available for businesses. The table shows how the rates have changed over the past years.
| Scenario | For expenditure incurred prior 1 April 2023 | For expenditure incurred after 1 April 2023 | For accounting periods beginning on or after 1 April 2024 |
|---|---|---|---|
| SMEs | Loss-making Up to 33.33% Profit-Making Up to 24.7% | Loss-Making Up to 18.6% Profit-Making Up to 21.5% | 15% - 16.2% |
| R&D Intensive SMEs (Loss-making) | Not applicable | Up to 27% At least 40% of total expenditure spent on R&D | Up to 27% At least 30% of total expenditure spent on R&D |
| Large companies | 10.5% | 15% - 16.2% | 15% - 16.2% |
Need guidance on the merged scheme? Our team of specialists is here to offer expert advice.
-
R&D costs can be broadly broken down into four categories:
Staff time that is spent both directly and indirectly on R&D is typically one of the most significant areas of recovery, and is mainly quantified through salary costs.
Software that is used for R&D, as well as software that indirectly contributes to the R&D activity, can be recovered.
Consumables are anything that is consumed, altered, modified or destroyed within the process of conducting R&D. This can be materials or utilities, like heat, light and power.
Third Parties are people who you pay to do R&D that are not on your payroll, such as other companies, technical consultants and agency staff; generally, you only get 65% of these costs as qualifying expenditure.
-
STAFF
Direct staff costs – this includes salaries, wages, class 1 NIC and pension fund contributions for members of staff that are directly working to achieve an advance in science or technology and overcoming technical uncertainty. This can be “hands on” R&D work, or supervisory and managerial work related to the R&D project.Indirect staff costs – these are costs related to members of staff that are indirectly contributing to the advance sought, by doing maintenance, clerical, security or administrative work related to the R&D.
R&D - related travel expenses – travel costs related to R&D are eligible if they are a necessary cost of the employment for R&D related staff. Simply put, they need to be incurred by the employee and expensed back to the company, rather than paid for on a company card.
SOFTWARE
Direct software – any software that is directly used in qualifying activities can be recovered. This could include software used for coding or used for the modification of existing software platforms.Indirect software – similarly to indirect staffing costs, software that is indirectly used to support qualifying activities can also be recovered. For example, software used by HR staff for routine work related to R&D staff would be included, whereas software used to train the HR staff would not be.
CONSUMABLES
Consumable items – materials which are consumed, modified or destroyed in the R&D process. This includes a proportion of water, fuel and power costs.Prototypes – design, construction and testing costs of prototypes are eligible for recovery. The cost of materials used in the prototype can also be eligible, providing the prototype is not sold (or intended to be sold).
“First of Class” items – Sometimes, it is not commercially viable to build a prototype of an innovative product due to the high commercial cost. These items are considered “First of Class” items and differ from prototypes in that the intention is for them to be sold from the start of development. Whilst the total build costs (such as costs for materials included in the final product) will not qualify, the R&D related design, construction, testing and material costs of first of class items are eligible to be recovered.
THIRD PARTIES
Subcontractors – third party companies or individuals undertaking work contributing to the R&D projects. There is a cap on subcontracted R&D costs of 65%, so for every £1 spent on a subcontractor involved in R&D, only 65p can be included as Qualifying Expenditure.Externally provided R&D staff – these are staff costs paid to an external agency for individuals directly involved in R&D activities, which are not employees or subcontractors. Externally provided R&D staff are treated similar to subcontractors; relief is only given on 65% of the payment made to the staff provider.
Clinical trial volunteers – payments made to volunteers taking part in clinical trials, involving the testing of pharmaceutical drugs, are eligible to be recovered. These are not subject to the 65% qualifying expenditure restriction.
-
Qualifying costs for large organisations are similar to SME’s ones with the exception of third parties.
For this category only costs associated to contributions to independent research qualify for R&D tax relief:
Contributions to independent research – costs paid to a charity, higher education institute, scientific research organisation, health service body, an individual or partnership of individuals, are eligible to be recovered, providing the costs are for relevant independent R&D.
It’s important to note that from accounting periods beginning on or after 1St April 2024, the RDEC and SME schemes have been merged into one consolidated framework with a single set of qualifying rules.
Learn about the Merged Scheme and its implications on your R&D claim.