A guide to R&D tax relief

This insight on R&D tax reliefs provides a step by step guide on the tax incentive. It outlines what constitutes an R&D tax relief claim, what qualifies and how to claim.

What is R&D tax relief? 

Research and development (R&D) tax reliefs are a Government incentive launched in 2000, designed to encourage more companies to invest in innovation. The Government have set a target that the UK’s total investment in research and development will be 2.4% of GDP by 2027. The R&D tax reliefs have a large part to play in reaching this target as they are a valuable injection of funds to enable businesses to invest in accelerating their R&D projects and ultimately growing.

There are two different schemes, one for SMEs and one for larger companies. 

How does R&D tax relief work?

If a company spends money (qualifying expenditure) on projects that are classed as R&D (qualifying activities) then they will most likely be eligible to claim R&D tax relief. The benefit received will depend on the company’s financial position and which scheme they will need to claim through and will either be a cash payment or a Corporation Tax reduction. 

What is qualifying activity?

The definition of R&D for the scheme is very broad and is the same for all size companies and all sectors, if your company is taking a risk by ‘attempting to advance the field or technology or science’ or ‘resolve scientific or technological uncertainties’ then you may be carrying out qualifying activity. 

This could include the creation, modification or changing of products, processes and services. 

If you’re not sure if your project is possible and the information on how to achieve it is not readily available, you could be resolving technological uncertainties and be carrying out qualifying R&D.

What costs qualify for R&D tax credits?

• Staff costs: including salaries, employers’ NIC, pension contributions and reimbursed expenses.
• Subcontractors and externally provided workers: can include companies you sub-contract work to and agency workers.
• Consumable materials: waste materials and consumables including heat, light and power that are used up during the R&D process.
• Software: software licences you needed to deliver the R&D project.
• Payments: to the subjects of clinical trials.

(The costs claimable can differ between the two schemes.)

What’s the benefit to me?

What makes you SME or Large (RDEC)?

• SME: Fewer than 500 staff and either not more than €100m turnover or €86m gross assets. 

• Large company: 500 staff or more and either more than €100m turnover or €86m gross assets.

However, there are a few factors such as grants and subcontracting that can mean an SME will claim through RDEC or both schemes. 

How do I claim?

A claim for R&D tax relief is made through your Corporation Tax Return (CT600L) that is submitted to HMRC.

There are many other factors to making a compliant claim and these include a technical justification and financial schedules to demonstrate how the claim value was calculated. 

Due to the complexities of the two schemes and understanding what is qualifying activity, we would always recommend seeking professional advice.