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R&D Tax Credits: Everything You Need to Know

Everything you ever wanted to know about R&D Tax Credits, including what they are, which companies are eligible, and how much they could be worth to your business.

R&D Tax Credits are a vital source of funding for UK innovators. 

Providing more than £5 billion in corporation tax reductions and cash credits a year, R&D Tax Relief helps tens of thousands of companies invest in cutting-edge development work that accelerate their growth. 

But while R&D Tax Relief is relatively accessible – especially when compared to other sources of funding – countless UK businesses are still failing to claim the financial support they’re entitled to through this scheme. 

To clear up some of the uncertainties and misunderstandings around R&D Tax Credits experts, our experts have prepared this comprehensive blog covering the main things you need to know about this generous initiative. 

If you’re planning to prepare your own submission, make sure you check out our Ultimate Guide to Claiming R&D Tax Relief, which offers a host of actionable advice on preparing a claim. 

If you have any questions about R&D Tax Credits, or are looking for expert help, just drop us a line. Our R&D Tax Credits specialists are standing by to help.

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Contents

What are R&D Tax Credits? 

R&D Tax Credits – AKA R&D Tax Relief – are a UK government subsidy that reward companies for investing in cutting-edge development work.

Popular among startups, scaleups and large established businesses alike, R&D Tax Credits work by reimbursing eligible businesses up to 33.35% of their development costs by giving them corporation tax reductions and cash payments.

Since its launch in 2000, the R&D Tax Relief scheme has paid out over £35 billion in financial assistance to thousands of companies working in a wide range of industries and sectors. 

Now, R&D Tax Relief delivers more than £5 billion a year in cash and tax relief, with the average claim sitting a little over £80,000.

To qualify for R&D Tax Credits, 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’.

What are the benefits of R&D Tax Credits?

Cash Injection

R&D Tax Relief let you claim up to 33% of your development costs back as a cash credit.

Competitive Edge

Finance new products, services and systems, gaining ground on the competition.

Maintain Control

Protect your equity and maintain control over your business with this non-dilutive funding.

Accessible Funding

R&D Tax Relief is much more accessible than other forms of innovation funding, like corporate debt or VC investment.

Fast Turnaround

You could receive a sizeable cash credit in as little as 28 days.

Ready to Claim

If you’ve already performed eligible R&D, your government funding is waiting to be claim

What’s the purpose of R&D Tax Relief? 

Despite its world-class universities, well-staffed scientific institutions, and thriving startup ecosystem, the UK spends just 1.7% of its GDP on research and development. 

This is far less than the OECD average of 2.4% and international competitors like the US and Germany, which invest 2.8% and 3.1% of their national output, respectively.  

Over the years, various UK governments have looked to address this underinvestment by introducing a range of legislation and financial programmes designed to stimulate R&D. 

R&D Tax Relief is one of these programmes. 

Since its launch in 2020, the scheme has provided more than £36 billion in government funding to thousands of cutting-edge businesses, stimulating billions more in privately-funded investment. 

By offering both a financial incentive and a way to reduce the financial risk of development work, R&D Tax Credits encourage UK businesses to invest in new products, services and solutions, increasing the country’s overall development spending.

How much are R&D Tax Credits worth? 

R&D Tax Credits let you recoup up to 33.35% of your qualifying expenditure. 

Exactly how much you can claim depends on your financial position, which scheme you apply to, and how much you’ve invested in R&D.

Financial Position SME R&D Tax Relief RDEC Scheme
Profitable
24.7%
10.53%
Breaking Even
18.85%
10.53%
Loss-Making
33.35%
10.53%

Calculate Your Claim

Want an instant estimate of your R&D Tax Credits windfall? Check out our R&D Tax Credit calculator.

The PAYE Cap: Are you vulnerable?

On 1 April 2021, HMRC introduced a limit to the amount of funding thousands of SMEs can claim through R&D Tax Relief. This limit is called the PAYE Cap. You can find out if it will affect your claim below.

Which companies are eligible for R&D Tax Credits?

R&D Tax Relief is a generous and accessible form of UK government funding. 

Last year, more than 60,000 companies claimed R&D Tax Credits, many for the first time. 

To qualify, you just need to be liable for UK corporation tax and have conducted development work that meets HMRC’s definition of ‘eligible R&D’. 

Companies in any industry can qualify for R&D Tax Credits, not just those working in high-tech or highly scientific fields. 

Call GrantTree for free eligibility assessment

Take our two-minute eligibility quiz!

Which costs can I claim R&D Tax Relief on?

You can claim R&D Tax Relief on eight kinds of development costs, including staff, contractors and consumables.

How much you can claim back varies depending on the cost and whether you are claiming for SME R&D Tax Relief or RDEC.

Here is a breakdown of the costs you can claim and how much you can claim back.

Cost SME Scheme RDEC Scheme
Content
100%
100%
Externally Provided Workers
65%
65%
Subcontracted R&D
65%
0%
R&D Consumables
100%
100%
Software
100%
100%
Clinical Trial Volunteers
100%
100%
Independent Research
0%
100%
Prototypes
100%
100%

Learn More

There are a few minor exceptions to this. You can learn more about them and eligible costs in general in this comprehensive blog.

How do I apply for R&D Tax Credits? 

While R&D Tax Credits is a relatively accessible form of funding, applying for the scheme can be a long, time-consuming process. 

If you make a mistake in your claim, you could face an HMRC compliance check or ‘enquiry’, which may delay your funding by several months.  

That’s why it’s a great idea to work with an R&D Tax Relief specialist like GrantTree

Our Tax and Technical Experts will take the weight off your shoulders, preparing a fully compliant claim while taking up as little of your time as possible.

Still, if you’d rather apply for R&D Tax Credits yourself, we’ve broken down the claims process into seven steps below. 

You can also have a look at our Ultimate Guide to Claiming R&D Tax Relief.

First, you need to work out which projects you’re going to claim for.

 

We generally suggest breaking up your development work into 3-5 projects. This keeps things simple for HMRC.

 

Each project must be made up of eligible activities. And the overall project needs to meet HMRC’s definition of R&D.

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. 

 

Here’s the complete list of qualifying costs and how much you can claim under each scheme. And here’s some information on claiming travel and subsistence costs and capital expenditure on equipment. 

 

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 ‘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.

Nothing raises red flags quicker at HMRC than numbers that don’t add up. Even simple, seemingly insignificant mistakes can land you with a lengthy HMRC compliance check.

 

So, before you file, make sure you’ve triple checked all of your calculations and figures.

 

It might just save you several months of extra effort.

Finally, combine your updated CT600 with your technical narrative and financial calculations (best to put these into one document).

 

Then send it all off to HMRC!

 

After you file, you'll be waiting 28 to 120 days to receive your money. That's assuming your claim doesn't get enquired

 

If you want to claim your R&D Tax Credits up to six months before your year end, check out our Advance Funding service. 

One last thing…

Those are the main steps you need to complete to file your R&D Tax Relief claim.

But like any part of the tax code, the R&D Tax Relief scheme is full of nuances and edge cases, which can make the claim process a lot more complicated.

So make sure you either check your claim against the Corporate Intangibles Research and Development Manual.

Or file with an R&D Tax Relief specialist like GrantTree, who’ll ensure your claim is fully compliant.

File with the Experts

GrantTree is one of the UK’s leading R&D Tax Relief providers. Through our streamlined and flexible service, we’ve secured over £200 million in funding for our clients, while maintaining a 100% claim acceptance rate. 

SME vs RDEC – which Scheme Should I Apply to? 

R&D Tax Relief is made up of two schemes: SME R&D Tax Relief and the Research and Development Expenditure Credit, commonly known as RDEC. There are four factors deciding which of the two schemes you should apply to.

  • Company Size
  • Business Connections
  • Project Funding
  • Subcontracted R&D

As their names suggest, the main difference between the two schemes is the size of company they serve. 

SME R&D Tax Relief serves SMEs. RDEC serves large businesses, plus certain SMEs.

Your company’s size is determined by the size test. It says you are a large company if you have:  

More than 500 employees
Or an annual turnover over €100 million
And a balance sheet over €86 million

Being legally ‘linked’ or ‘partnered’ to other businesses can change your eligibility for SME R&D Tax Relief.

In both cases, you may have to add some or all of the outside company’s headcount, turnover and bank balance to your own when you take the size test. 

This could turn you into a large company for the purposes of R&D Tax Credits.

If you finance your development work with other forms of government funding, like an innovation grant, it could impact your ability to claim SME R&D Tax Relief. 

The relationship between SME R&D Tax Relief, RDEC and other state aid is complex. 

For example, a non-project-specific grant will impact your R&D Tax Credits claim differently than a project-specific grant. 

We cover this issue in much more detail here: Grants and R&D Tax Credits: Can I Claim Both?

HMRC has strict rules around claiming subcontractor costs. 

For example, The SME scheme does not allow companies to claim for any expenses associated with work they’ve been subcontracted to do by another small business. 

However, SMEs can claim for development costs through the RDEC scheme if

they’ve been subcontracted by a large company.

Head over to this blog for a full rundown of how subcontracting impacts your claim.

What happens after I file? 

After you file, an HMRC tax inspector will look over your claim. Then, one of two things could happen.

HMRC could process your claim without any further checks. In which case, you should receive your tax relief or cash credit somewhere between 20 and 120 days after you file. 

Though there is a way to claim your R&D Tax Credit up to six months early

Alternatively, HMRC could launch an enquiry against your claim

The purpose of an enquiry is to determine whether your company is actually eligible for R&D Tax Relief. And to work out whether you’ve claimed too much through the scheme.

An enquiry will delay your claim for anywhere between a few months to more than six years. It will have other impacts too. Like consuming your senior and financial and technical people’s time. 

And HMRC deems that you’ve deliberately claimed too much tax relief, you could also face penalties and fines. 

Get Your Money Six Months Early

Through our unique Advance Funding service, we could advance you up to 80% of your R&D Tax Credit claim up to six months before your financial year-end. No more waiting around for HMRC! Click below to find out more.

Let the experts handle your claim

That brings us to the end of our introduction to R&D Tax Credits. 

If you have any other questions about R&D Tax Credits, be sure to check out our FAQ section below. You can also speak to one of our experts directly! 

Just drop us a line, and we’ll be right with you to help you with your claim.

FAQs

Our tax and technical experts answer some of your most pressing questions about the R&D Tax Relief scheme.

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 accounting period in which eligible development work took place ends.


Read more: How Far Back Can I Claim R&D Tax Credits?

Some companies think they can’t receive grants and R&D Tax Credits for the same work. Thankfully, this isn’t true.

 

Though there are various kinds of grants available, none of them will prevent your company from claiming R&D Tax Credits too. 

 

But winning a grant will impact your R&D Tax Credits claim.


Read more: Grants and R&D Tax Credits - Can I Claim Both?

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.


Read more: R&D Tax Credits: Navigating the RDEC Scheme.

If you make a mistake there’s a growing chance HMRC will launch an enquiry, where an inspector will go over your R&D Tax Credit claim in greater detail.

 

This will delay your relief or cash credit, could lead to your claim size being reduced, and may even result in a fine.


Read more: R&D Tax Credits: HMRC Audits and Enquiries

Sole traders cannot claim R&D Tax Credits. 

 

R&D Tax Credits are only open to businesses that are liable for UK corporation tax. As sole traders do not pay corporation tax, they’re ineligible for the R&D Tax Credits 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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