R&D Tax Credits: What Are They? Can I Claim?
Everything you ever wanted to know about R&D Tax Relief, including:
- Are you eligible?
- How much you can claim
- How to prepare a compliant claim
- What happens after you file
- What the risks are
Contents
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What is R&D Tax Relief?
R&D Tax Relief is a UK government subsidy that rewards companies for investing in cutting-edge development work.
Popular among startups, scaleups and large established businesses alike, it works by reimbursing eligible businesses a percentage of their investment in qualifying R&D through corporation tax reductions and cash credits.
Since its launch in 2000, Research and Development Tax Relief has paid out over £42 billion in financial assistance to thousands of companies working in a wide range of industries and sectors.
Consisting of three separate initiatives – SME R&D Tax Relief, the Research and Development expenditure credit (RDEC), and enhanced R&D intensive support (ERIS) – this generous scheme delivers more than £7 billion a year to growing businesses.
You have up to two years after the end of the accountancy period in which you conducted the development work to submit your claim.
To qualify, your company must be registered in the UK, liable for corporation tax, and have conducted research and development work that satisfies HMRC’s definition of ‘eligible R&D’.
Note: SME R&D Tax Relief is decreasing while the RDEC rate is rising. Learn more about the 2023 changes here.
What are the benefits and features?
Receive a cash injection
Accessible funding
Gain a competitive edge
Fast turnaround
Maintain control
Two-year window
Are R&D Tax Credits the best way to fund my project?
R&D Tax Relief has a range of advantages over other forms of research funding. Most notably, it’s open to all industries, not just those on the cutting edge of technology.
Another advantage: R&D Tax Credits are usually paid out pretty quickly, with HMRC processing most claims within 28 days.
Research and Development Tax Relief is likely one of the best ways to fund your innovation, with the only limiting factors being the eligibility criteria your application’s compliance with HMRC regulations, and your ability to maximise your claim size. That’s where we can help.
GrantTree’s specialists have years of experience building successful, fully-compliant claims. We know what works and what doesn’t.
Most importantly, we take the stress out of applying to the scheme so you can focus on expanding your team, developing new products and services, and reaching new customers.
How much can I claim?
The short answer is that you can recoup up to 33p per £1 of qualifying expenditure incurred before 1 April 2023 and up to 27p per £1 spent on or after this date.
The longer, more accurate answer is that it depends on a wide range of factors, like which scheme you’re applying to, whether you’re profitable or loss-making, and your corporation tax rate.
Below, we’ve broken out the top-level relief rates for the SME, RDEC and enhanced R&D intensive support schemes.
As you’ll see, working out much funding you should claim can get pretty complicated. If you get it wrong, you could face a lengthy HMRC enquiry.
Financial years starting on or after 1 April 2024
| Financial Position | Merged Scheme | ERIS Scheme |
|---|---|---|
|
Profitable |
15% to 16.2% |
- |
|
Breaking Even |
15% |
12.04% |
|
Loss-Making |
15% |
27% |
Expenditure From 1 April 2023 (Financial Years Starting Before 1 April 2024)
| Financial Position | SME Scheme | RDEC Scheme | ERIS Scheme |
|---|---|---|---|
|
Profitable |
16.34% to 21.5% |
15% to 16.2% |
- |
|
Breaking Even |
8.6% |
15% |
12.04% |
|
Loss-Making |
18.6% |
15% |
27% |
Expenditure Before 1 April 2023
| Financial Position | SME Scheme | RDEC Scheme |
|---|---|---|
|
Profitable |
24.7% |
10.53% |
|
Breaking Even |
18.85% |
10.53% |
|
Loss-Making |
33.35% |
10.53% |
Which costs are eligible for relief?
Unfortunately, you can’t usually claim Research and Development Tax Credits for all the development work you conducted over the last year. Instead, you’ll typically claim for a handful of ‘R&D projects’.
What are R&D projects?
Essentially, R&D projects are slices of your development work, with each project consisting of the direct and indirect activities you have performed to achieve a specific development goal, such as developing a new software feature, adapting a construction method for a specific need, or upgrading an internal process.
Each project you submit for consideration must be independently meet the scheme’s eligibility criteria.
Which costs qualify?
Each of your R&D projects will have its associated costs – your people’s time, subcontractors, materials, and so on. These costs – your qualifying R&D expenditure – are the backbone of your claim.
There are ten kinds of costs that are eligible for relief. We’ve compiled them and the amount of relief you can claim for each one in the table below.
When building your claim, it’s important to accurately apportion each of these costs based on how much was incurred by eligible activities and to make sure to claim the appropriate amount for the scheme you’re claiming for.
| Cost | Description | Maximum Relief |
|---|---|---|
|
Direct Staff Costs |
Includes Salaries, Class 1 NIC and pension contributions for staff directly involved in R&D. |
100% |
|
Unconnected Externally Provided Workers |
Temporary workers sourced from an external agency. |
65% |
|
Unconnected Subcontracted R&D |
Projects or pieces of work outsourced to an external company. |
65% |
|
R&D |
Consumables Materials and resources consumed in the R&D process. |
100% |
|
Software |
Software that is directly employed by eligible R&D activities. |
100% |
|
Clinical Trial Volunteers |
Payments made to volunteers in clinical trials are eligible. |
100% |
|
Contribution to Independent Research |
Payments made by to other companies carrying out eligible R&D. |
100% |
|
Prototypes |
Costs associated with the design and construction of prototypes needed to test your development work. |
100% |
|
Cloud Costs |
Purchasing cloud computing solutions |
100% |
|
Data Licenses |
Cost for accessing and using a collection of digital data |
100% |
Which costs don't qualify?
Any costs not listed above aren’t eligible relief, meaning that you can’t claim for the following:
- The costs of any and all commercial activities required to get a product to market
- Producing and distributing products and services
- Land
- Creating a patent or using a third party’s patent
- Capital expenditure, although companies can claim for capital expenditure in certain circumstances
If you’re unsure about which of your costs are eligible, it’s important to talk to an expert before making a claim.
We take the time to understand your project so we can claim every eligible penny possible while maximising your chances of a successful application.
What are the scheme's eligibility criteria?
To file a successful claim for Research and Development Tax Relief, your company and its projects must satisfy the government’s “definition of R&D for tax purposes”.
The definition was set by the Department for Business, Energy & Industrial Strategy (BEIS) and runs to a rather daunting 12 pages.
It also contains various technical concepts that can be difficult to apply to real-world development work.
To make things simpler, we have distilled the conditions into three core elements.
Element 1: Corporate eligibility
Your company must be a UK-registered business that is liable for corporation tax.
You don’t need to be paying corporation tax as R&D Tax Relief is open to unprofitable businesses without taxable profits. However, your business cannot be entirely exempt from corporation tax, as is the case for LLPs and sole traders.
Element 2: Qualifying projects
Explaining what a project is and how it relates to the government’s definition of qualifying R&D is where things get complicated.
We’ve taken things slowly and used plenty of examples. However, if, after reading this section, you are still unsure whether your project qualifies, the best thing to do is speak to an expert.
The government says that companies’ research and development work consists of one or more ‘projects’. A project is essentially a collection of activities that directly or indirectly contribute to achieving a scientific or technological advance. More on qualifying activities in the next section.
A scientific or technological advance is an evolution in the overall knowledge or capabilities of a particular field. It is more than the application of scientific or technical concepts; it’s the creation of something entirely new, be it tangible (e.g. a product or feature) or intangible (e.g. process improvements).
According to the government’s definition of qualifying R&D, a project begins when your development team attempts to overcome scientific or technological uncertainties.
An uncertainty is where your competent professional cannot readily deduce how to achieve the advance, or indeed whether the advance is even possible. This can include how to create a brand new technology or improve an existing one. The only way to move forward is methodical experimentation.
A competent professional (CP) is someone with significant expertise in the field in which you’re conducting R&D. They must be knowledgeable about the scientific and technological principles involved, aware of the state of the art in their field, and recognised as having a successful track record in the relevant areas. To qualify for R&D Tax Credits, your projects must be led by a CP.
If the CP cannot deduce a solution to your scientific or technological uncertainties, there is only one way to move your R&D forward: experimentation.
The government requires companies to experiment methodically. To try one solution, record the results, gain insights, reassess, try another solution, and so on. Subsequently, unstructured experimentation and ‘stabs in the dark’ are not part of valid R&D.
Element 3: Eligible activities
Eligible research and development projects are made up of one or more qualifying activities.
There are two kinds of qualifying activity: direct – those that directly contribute to resolving a scientific or technological uncertainty, and indirect – those that form part of a qualifying project but don’t contribute to resolving uncertainties.
Direct activities contribute to achieving an advance by attempting to resolve an uncertainty. They are:
- Creating or adapting software, materials or equipment for use in R&D
- Scientific or technological planning
- Scientific or technological design, testing and analysis
Certain activities which do not contribute to resolving an uncertainty but form part of an R&D project are eligible for R&D Tax Credits. They are:
- Information services that support research and development, such as reporting R&D findings
- Supporting activities including maintenance, security, administration, clerical work, and financial and personnel management
- Essential ancillary activities such as leasing laboratory space and recruiting staff
- Training
- Research carried out by students or at universities
- Research to devise new testing methods
- Feasibility studies to inform the direction of R&D activity
Does an R&D project need to succeed to qualify?
You might be pleased to learn that, when it comes to your development work, failure is an option.
HMRC’s definition of qualifying R&D activity says nothing about “success”. In fact, failure can actually help your claim because it demonstrates that you encountered a scientific or technological uncertainty – a key part of the government’s definition of qualifying R&D.
Even if your project is successful, it’s still important to show HMRC that you faced challenges during your development work.
Is my company eligible?
In the previous section, we explained that to qualify for Research and Development Tax Credits your company must:
- Be UK-registered business
- Be liable for corporation tax
- Have conducted one or more research and development projects that satisfy the government’s definition of qualifying R&D
It can be difficult to apply the government’s criteria to your development work, which is why it’s best to request a consultation with a specialist before applying.
However, to give you a quick sense of your eligibility, your company will probably qualify for funding if it answers yes to the following questions:
Even if you didn’t answer yes to each of these, you might still be eligible. The best way to know for sure is to speak to an expert who can talk through your approach to R&D and help you with your claim.
A step-by-step guide to preparing a claim
Below are the six steps to filing a typical claim.
If you haven’t claimed R&D Tax Relief before or in any of your company’s last three accounting periods, you will need to submit a claim notification form.
1. Select your projects
The first thing you’ll need to do when building your claim is to identify which projects you will include in your claim.
Each project must meet the government’s definition of R&D and consist of eligible activities.
2. Work out which scheme to apply to
Next, you must determine whether you are eligible for SME R&D Tax Relief, RDEC or enhanced R&D intensive support.
The scheme you apply to will affect which costs you can include in your claim and how much funding you can access.
If you’re unsure which scheme to apply for or are looking to split your claim to maximise your relief, it’s best to seek help from a specialist like GrantTree.
Get advice on which scheme is right for your company.
Note: the government is combining SME R&D Tax Relief and RDEC into a merged scheme. Read more about the new merged scheme here.
3. Calculate your claim size
Once you’ve worked out which scheme you’re applying to, it’s time to calculate your ‘total qualifying expenditure’.
First, identify all of your qualifying costs.
Apportion them to your qualifying projects, then work out how much of each one you can claim under the scheme you’re applying to.
What you do next depends on which scheme you’re applying to.
If you’re applying to the SME or enhanced R&D expenditure schemes, you will apply the enhancement mechanism, which will artificially increase the value of your qualifying expenditure.
If your company is profitable, enhancement will decrease your profitability, reducing your corporation tax liability.
If you’re unprofitable, it will increase your loss. You can surrender your loss for a cash credit, or carry it forward to offset against future corporation tax.
If you’re applying under RDEC, you’ll receive a cash credit worth either 10.53% or 16.2% of your qualifying expenditure.
4. Fill out your additional information form
As of 8 August 2023, all companies will must file an additional information form (AIF). Those that don’t will have their claims rejected.
In this form, you need to enter a range of information about your development work and company, including:
- What scientific and technical advances you were seeking
- What uncertainties you encountered
- Your project costs broken down by the nine categories of qualifying expenditure
- How much you spent on indirect qualifying activities
- Contact details for the person at your company responsible for your R&D
You don’t necessarily have to provide this information on all of your projects; it depends on how many projects you conducted during your claim period.
HMRC will not process your claim until they have received your additional information form, so make sure you file it before your Company Tax Return.
5. Update your CT600
Next, update your CT600 with the relevant financial information.
How you do this depends on which scheme you’re claiming through and whether you’re claiming corporate tax relief or a payable tax credit.
6. File your claim
Finally, file your claim, including the additional information form, with HMRC.
Tips for maximising your claim
Here are a few tips for making sure you claim is compliant while securing your full entitlement to relief.
1. Record your R&D challenges as they happen
Keep a running log of any issues and obstacles in your development work you faced during your development work. Doing this once a quarter should be sufficient.
Management-hosted check-ins with the development team are a great way to do this. In addition to talking about progress and the business generally, management can enquire about challenges and failures.
2. Track staff and materials
It’s important to track every hour and resource unit invested in your R&D project, as having complete, well-maintained records will help you capture all eligible costs, making the claim process smoother and faster.
3. Account for every penny
How much relief your company receives depends, to a large degree, on your claim size. So, important to account for every penny of eligible expenditure.
You can do this by going through your outgoings and checking which are eligible. Make sure you cover your costs for utilities, consumables and all staff that were involved in the project, including those involved in eligible indirect activities.
4. Work in your financial year
It’s important to always work within your company’s financial year, not HMRC’s tax year. Expenses outside the financial year or years you’re working in aren’t eligible in that year’s claim.
5. Balance your technical narrative
It’s beneficial to tie the length of your technical narrative to the monetary size of your claim. There’s no need to write pages and pages, but make sure to include necessary detail if a project was particularly costly, complex or lengthy.
6. Double, triple, quadruple check!
Finally, before you file, go through your claim with a fine-toothed comb and check that all your calculations can be matched back to your P&L, tax computations and CT600.
There’s no bigger red flag for HMRC than numbers not adding up! All costs must be matched and consistent so that HMRC to identify which costs are located where.
Download the Ultimate Guide
For even more advice and tips on filing a maximised, fully-compliant claim, check out GrantTree’s Ultimate Guide to R&D Tax Relief.
Our guide covers how to identify eligible projects, activities, and costs; expert tips for maximising your claim; common mistakes to avoid; and what happens after you file your claim, including what can go wrong.
Download your copy below.
How long does it take to receive R&D Tax Credits?
HMRC aims to process 95% of claims within 28 days.
However, in our experience, processing times can range anywhere from 20 to 100 days. If your claim is approved, it will take a further 20 days for your funds to reach your account.
In total, you could be waiting up to 120 days from the day you file your claim to receive your R&D Tax Credits.
It’s important to be aware that other factors could increase the time it takes to process your claim. For instance, December and March are typically busy for HMRC, as this is when many companies have their year ends.
The complexity of your business or claim can also increase the processing time of your claim, which is why it usually takes HMRC more time to process claims from larger companies, for instance, those applying for the RDEC scheme.
The other thing that can slow down your claim is an enquiry, which we’ve covered in the next section of this guide.
Get your funding 12 months early!
With GrantTree’s unique Advance Funding service, we could advance you up to 80% of your claim up to six months before your financial year-end!
Can anything go wrong?
Most R&D Tax Credit claims are processed successfully and without any issues. Especially when you work with experts like GrantTree.
However, if you made a mistake or claimed for something you shouldn’t have, HMRC may launch a compliance check or ‘enquiry’.
What is an HMRC enquiry?
An enquiry is essentially an investigation of your R&D Tax Credit claim.
Enquiries generally happen when the tax inspector reviewing your tax credit submission finds a discrepancy in your financial data or is unsure whether some aspect of your development work is eligible for funding.
What happens during an enquiry?
To clear up their concerns, your inspector will write to you with a list of questions designed to collect more financial and technical data about your R&D.
Over the course of your enquiry, you can expect to answer multiple rounds of detailed questions, usually in writing, sometimes over a conference call or during an in-person interview.
These questions can take months or even years to settle.
What are the outcomes of an enquiry?
The back-and-forths which will inevitably significantly delay your funding. But the impact of an enquiry can be far worse than a simple delay.
For starters, dealing with an enquiry is certain to embroil your technical and financial teams in lengthy back and forths with tax inspectors. It may also damage your relationship with HMRC and end up reducing your credit amount.
As well as the risk of reducing your R&D funding amount, it’s also possible that HMRC will reject your claim following an enquiry. In worst-case scenarios, HMRC could also find you guilty of negligence or deliberately claiming fake expenses, which can result in a hefty fine.
Protecting yourself from an enquiry
Because of these dangers, it’s vital that your R&D Tax Credits claim is fully justified and compliant with all the latest regulations. The easiest way to achieve this is to work with a consultant like GrantTree.
We have the knowledge and experience to build a watertight claim that minimises your risk of an enquiry while increasing the speed of your payout.
Get in touch to find out more about how we can help you.
FAQs
Still want to know more? Our experts have answered a range of questions they commonly receive about R&D Tax Relief below.
If you can’t find the answer you’re looking for below, just get in touch.
Yes. Assuming you’re still conducting eligible development work, you can absolutely claim R&D Tax Credits every year.
Read more: R&D Tax Credits: Can I File Every Year?
You can claim R&D Tax Credits up to two years after the end of the accounting period in which your eligible development work took place.
Read more: What is the Deadline for R&D Tax Claims?
Some companies think they can’t receive grants and R&D Tax Credits for the same work. Thankfully, this isn’t true.
There are various kinds of grants available, but none of them will prevent your company from claiming R&D Tax Credits.
However, winning a grant could impact how much funding you can claim through the R&D Tax Credits scheme and your eligibility for SME R&D Tax Relief.
The RDEC scheme is not a form of government grant. However, it is a form of government funding.
RDEC is one of two schemes that make up R&D Tax Relief. Like its partner scheme, SME R&D Tax Relief, RDEC is a form of corporation tax relief paid to companies that conduct eligible development work.
Making a mistake in your claim – even a small one – significantly increases your chances of facing an HMRC enquiry. This is where a tax inspector investigates the accuracy and eligibility of your claim.
Facing an enquiry will delay your relief or cash credit, could lead to your claim size being reduced, and may even result in a hefty fine for your business.
Read more: R&D Tax Credits: What is an HMRC Enquiry
Sole traders cannot claim R&D Tax Credits.
R&D Tax Credits are only open to businesses that are liable for UK corporation tax. Sole traders do not pay corporation tax. As a result, they are ineligible for the scheme.
No, universities cannot claim R&D Tax Relief.
Universities and other not-for-profit organisations could claim R&D Tax Credits until 2015. However, the government decided to withdraw their access to this programme to ensure it remained “effective and well-targeted to business Research and Development.”
Charities cannot claim R&D Tax Relief.
Charities and other not-for-profit organisations were previously able to claim R&D Tax Credits through RDEC. But the government withdrew this facility in 2015 to “ensure that the scheme remains effective and well-targeted to business Research and Development.”
No. LLPs do not qualify for R&D Tax Credits directly.
R&D Tax Relief is only open to companies that are liable for UK Corporation Tax. As LLPs are exempt from corporation tax, they cannot claim R&D Tax Relief.
However, LLPs can claim R&D Tax Credits if they are in a partnership with another company that is liable for corporation tax.
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