Welcome to GrantTree’s simple guide to claiming R&D Tax Credits for your business.
This article covers the key things you need to know about this popular and generous source of government funding, including who’s eligible, how much money you could receive, and how to apply.
For a more complete picture of how to claim, make sure you check out our Ultimate Guide to R&D Tax Credits, available for download now.
If you have any questions about the scheme, or want some advice on preparing your claim, our R&D Tax Credits experts are standing by to help.
What are R&D Tax Credits?
R&D Tax Credits are a government scheme that rewards UK companies for conducting research and development.
Since its launch more than 20 years ago, the R&D Tax Credits scheme has paid out £33 billion to tens of thousands of cutting-edge companies and now delivers more than £5 billion a year in government support.
Popular among startups, scaleups and established businesses alike, R&D Tax Credits work by reimbursing eligible businesses up to 33.35% of their development costs through corporation tax reductions and cash payments.
R&D Tax Credits are available to businesses in a wide variety of industries, from food to fashion, manufacturing to medicine.
To qualify, your company must be incorporated in the UK, be liable for UK corporation tax, and conduct development work that meets HMRC’s strict criteria for eligible R&D.
Am I eligible for R&D Tax Credits?
Every year more than 60,000 UK companies successfully claim upwards of £5 billion worth of R&D Tax Credits.
These figures might make you think that the R&D Tax Credits scheme is imminently accessible; that HMRC lets pretty much anyone claim thousands of pounds in public funding without so much as a second look.
The reality, though, is very different.
R&D Tax Credits are governed by a strict set of eligibility criteria that cover everything from the objectives of your development work to the qualifications of your technical team.
These criteria are not just extensive. Like many other elements of tax legislation, they can also hard to apply.
To give you a better understanding of the scheme’s eligibility criteria, our R&D Tax Credits team has drawn up this simple, easy-to-apply eligibility checklist.
If you tick all these boxes, there’s an excellent chance that your company will qualify for R&D Tax Credits.
It’s not a sure thing, of course. So if you’re still uncertain about whether you qualify, it might be time to speak to an R&D Tax Credits specialist.
How Much Can I Claim?
R&D Tax Relief gives you back between 13% and 33.35% of your development spending. Exactly how much relief you’ll receive depends on four factors.
How much you spend on R&D
R&D Tax Credits work by refunding companies some percentage of their eligible expenditure.
The more you invest in your development work, the higher your eligible expenditure is likely to be, and the more money you can claim back from the government.
SME vs RDEC
Available to small and medium-sized businesses, the SME scheme allows companies to recoup up to 33.35% of their development costs, either as a payable tax credit, a tax reduction, or a combination of the two.
RDEC serves large businesses and some smaller companies that are ineligible for the SME scheme. It offers a taxable credit worth 13% of eligible expenditure.
The main factor deciding which of these two schemes you should apply to is size. Generally, companies that are considered SMEs should apply for the SME Tax Relief. Large companies must apply for RDEC.
But your company’s size isn’t the only thing deciding which scheme you need to apply to.
Even if you qualify as an SME, you may have to apply to the RDEC scheme if your business:
Your financial situation
RDEC offers a fixed rate of relief, regardless of your financial situation.
SME R&D Tax Relief gives you back between 19% and 33% of your development spending.
Exactly much you receive depends on your financial situation and, of course, the size of your claim.
Loss-making companies receive up to 33.35% of their expenses back as a cash credit, while profitable companies receive up to 24.7% of their investment back as tax relief.
Companies at breakeven are given the least relief: just 18.85% of eligible expenditure. We call this the Valley of Death.
The PAYE Cap
The PAYE/NIC Cap limits the size of payable tax credit companies can receive through the SME R&D Tax Relief scheme.
The cap is set at three times your combined PAYE and National Insurance Contribution liability. Plus a £20,000 grace amount.
Any amount over this limit will be forfeited.
Calculate Your Claim
How Do I Apply for R&D Tax Credits?
Filing a fully-maximised, fully-compliant R&D Tax Credits claim can be a long, complicated process. And if you get something wrong, you could end up facing an HMRC enquiry, which could delay your R&D Tax Credit by up to six months.
So if you’re strapped for time, worried about making a mistake, or keen to claim every penny possible, it’s a good idea to call in an R&D Tax Credits expert.
If you’re eager to file for R&D Tax Credits yourself, we’ve tried to make things a little easier by breaking down the claims process into six easy-to-follow steps.
As with most things tax-related, the R&D Tax Credits scheme has an almost endless list of grey areas and edge cases that we haven’t been able to cover in this guide.
So, if you’re unsure how some aspect of the scheme applies to your claim, feel free to drop us a message in our website’s chat function.
R&D Tax Relief is made up of two schemes: the SME R&D Tax Relief and the Research and Development Expenditure Credit (RDEC).
Which scheme you apply to depends on your company’s size, its financial connection to other companies, and a few other factors.
You can read more about the two schemes here.
Once you’ve worked out which scheme you’re applying to, it’s time to work out the size of your claim.
First, add up all your qualifying costs and apportion them to your eligible projects.
After you add everything up, you’ll have your total qualifying expenditure.
If you’re claiming under the SME scheme, you need to increase your total qualifying expenditure by 130%. This is called R&D enhancement.
Enhancing your total expenditure gives you your enhanced expenditure. This is the amount you’re going to claim.
Sadly, there is no enhancement when it comes to RDEC.
The technical narrative is your chance to demonstrate, in layman’s terms, exactly what work was undertaken, along with any challenges you faced along the way.
Technical narratives should be between 2 and 5 pages of A4, covering however many of your projects makeup at least 50% of your total R&D expenditure.
There are a lot of nuances to writing a solid technical narrative. But the bottom line is that this is your chance to shout about what you did, why you did it and (most importantly) how you did it.
Submitting a technical narrative isn’t mandatory. But it will significantly reduce your chances of receiving an HMRC enquiry, which could delay your tax credits by several months.
Completing your CT600 is a simple matter of plugging your financial calculations into the right boxes.
How you do this depends on whether you’re applying for the SME or RDEC scheme and whether you’re claiming corporate tax relief or the payable tax credit.
For in-depth instructions on completing or updating your CT600, check out Preparing the CT600: The Last Piece of the Jigsaw.
All you need to do now is combine your updated CT600 with your technical narrative and financial calculations (best to put these into one document).
Once that’s done, it’s time to send everything off to HMRC.
For more information about filing an R&D Tax Credits claim, take a look at this list of other blogs and resources from GrantTree.
Download GrantTree's Ultimate Guide to R&D Tax Credits
What Happens After I Apply?
The next step is the easiest: You wait.
An HMRC tax inspector will review your company’s claim, including your technical narrative and financial calculations.
If they approve the claim, your inspector will write to you confirming they’ve processed your cash credit or tax reduction.
When will I receive my R&D Tax Credits?
HMRC aims to process 95% of R&D Tax Credits claims within 28 days. But in our experience, processing times can range anywhere from 20 and 100 days.
The time of year and the complexity of your claim can also affect processing times.
Once HMRC has processed your claim, you could then be waiting another 20 days to receive your money.
So, in total, it can take up to 120 days to receive your R&D Tax Credits.
Get Your R&D Tax Credit Early!
Can Anything Go Wrong?
Most claims pass without a hitch. And yours should too if you’ve made sure you’re eligible and have filed an accurate, clear and well-presented claim.
But if you have made an error or mistakenly claimed for something you shouldn’t have, HMRC may ask you some questions or launch what’s called ‘an enquiry’.
An enquiry is where HMRC launches an investigation into your R&D Tax Credit claim.
The purpose of an enquiry is to determine whether your company is actually eligible for R&D Tax Credits. And to work out whether you’ve claimed too much government funding.
Facing an enquiry is challenging work. Even if your claim is 100% accurate, your enquiry could last several weeks and delay your cash credit or tax relief by up to six months.
If the inspector does find something they disagree with, they could reject some or all of your claim.
In more extreme situations, HMRC could find you guilty of negligence or deliberately claiming illegible or fraudulent expenses. Either ruling could result in a hefty fine.
The best way to avoid an enquiry is to file a watertight claim. And the best way to do that is to work with an R&D Tax Credits consultant.
Key Resource: The Ultimate Guide to HMRC Enquiries. What they are, how they work, and how to avoid them!
Frequently Asked Questons
As is probably clear by now, the R&D Tax Credits scheme is filled with nuances and edge cases; far too many to cover in a single guide.
If you still have questions about your claim, take a look through this list of FAQs and their corresponding answers. If you’re still stumped, feel free to give us a call!
Can I Claim R&D Tax Credits Every Year?
Can I Claim Grants and R&D Tax Credits?
Should I Use An R&D Tax Credits Specialist?
How Far Back Can I Claim Tax Credits?
Still Have Questions about R&D Tax Credits?
That brings us to the end of GrantTree’s Ultimate Guide to R&D Tax Credits.
If you have any more questions about the R&D Tax Credits scheme, make sure you check out the wide array of information in our resources section, or just drop us a line. Our R&D Tax Credits specialists would be happy to help you.