What Is R&D Tax Relief?
TLDR: R&D tax relief is a UK Corporation Tax incentive designed to support companies carrying out qualifying research and development. Your business does not need to be working in a laboratory or inventing something completely new. If you are trying to achieve an advance in science or technology and need to overcome genuine scientific or technological uncertainty, some of the related costs may qualify.
What is R&D tax relief and how does it work?
R&D tax relief is designed to encourage UK companies to invest in innovation.
Depending on the company and the scheme it qualifies for, the relief can reduce a Corporation Tax liability or result in a payable tax credit.
However, R&D has a specific meaning for tax purposes.
Simply developing a new product, improving a service or writing software does not automatically mean a project qualifies. HMRC looks at whether the project was seeking an advance in science or technology and whether it involved scientific or technological uncertainty.
In simple terms, the company needs to be trying to solve a technical problem where the answer was not already obvious or readily available to a competent professional working in that field.
You can read more in the HMRC guidance on R&D tax relief.
Which businesses can claim R&D tax relief?
R&D tax relief is available to companies subject to UK Corporation Tax that carry out qualifying research and development.
It can be particularly relevant to businesses working in areas such as:
- Software and SaaS
- Technology
- Engineering
- Manufacturing
- Construction
- Product development
- Scientific research
- Specialist technical services
The sector itself does not determine whether a business qualifies.
For example, a software company does not automatically qualify simply because it develops software. The question is whether the company was trying to achieve a genuine technological advance and had to overcome uncertainty in the process.
You do not need a groundbreaking invention
A common misconception is that R&D tax relief is only for businesses creating something completely new.
That is not necessarily the case.
A project may qualify when a company is making a significant improvement to an existing product, process, material, device or service, provided it is seeking a qualifying scientific or technological advance.
Projects do not always have to succeed either. Work carried out while attempting to resolve genuine uncertainty can still be relevant even if the final outcome was unsuccessful.
What R&D tax relief schemes are available?
There are two main routes for companies claiming R&D tax relief.
The merged R&D expenditure credit scheme
The merged R&D expenditure credit scheme is available to companies carrying out qualifying research and development.
The headline credit rate is 20%, although the actual financial benefit will depend on the company’s tax position and circumstances because the credit itself is taxable.
Enhanced R&D intensive support
Enhanced R&D intensive support, often referred to as ERIS, is available to qualifying loss-making SMEs that meet the R&D intensity conditions.
A company will generally need its qualifying R&D expenditure to represent at least 30% of its relevant total expenditure.
Which route applies will depend on factors such as the company’s size, profitability and level of qualifying R&D expenditure.
What costs can qualify for R&D tax relief?
Once a company has identified qualifying R&D activity, the next step is to work out which related costs may be included in the claim.
Depending on the circumstances, qualifying costs can include:
- Employee costs relating to staff working on R&D
- Certain software costs
- Consumable materials used during R&D
- Relevant data and cloud computing costs
- Some externally provided workers
- Qualifying subcontracted R&D costs
Not every cost connected with an innovative project will qualify.
For example, capital expenditure, land, patents and trademarks are not qualifying expenditure under the main R&D tax relief schemes.
HMRC provides more detail in its guidance on which R&D costs can be claimed.
How do you know whether your project qualifies?
A useful starting point is to ask a few practical questions.
- What scientific or technological advance was the business trying to achieve?
- What problem or uncertainty was preventing the team from using an existing solution?
- Why could a competent professional not easily resolve that uncertainty?
- What work did the business carry out to find a solution?
- Which staff members, suppliers or other costs were directly involved?
Keeping good records can make this process much easier. Technical notes, project documentation, staff records and cost information can all help support the claim.
How do companies claim R&D tax relief?
R&D tax relief is claimed through the company’s Corporation Tax return.
Companies making a claim will also generally need to provide an additional information form to HMRC. In some circumstances, a claim notification form may also be required.
The supporting information is important because HMRC expects businesses to explain what the project was trying to achieve, what scientific or technological uncertainty existed and how the company attempted to resolve it.
You can find more information in HMRC’s guidance on making an R&D tax relief claim.
Why should growing companies review their R&D activity?
For growing companies, it is worth reviewing R&D activity regularly rather than waiting until the year end.
Identifying potential R&D projects as they happen can make it easier to keep useful technical records, track relevant costs and understand the overall investment being made in development.
It can also help directors see how product development, software projects or technical improvements affect cash flow, profitability and future investment decisions.
R&D tax relief can be valuable, but it should be approached carefully. The aim should be to make a well-supported claim based on genuine qualifying activity rather than assuming that every innovative project will qualify.
Get support with your R&D tax relief claim
If your company is developing software, products, processes or technical solutions and you are unsure whether the work could qualify, getting advice can help you understand your position before making a claim.
AGILE Accountants supports owner-managed limited companies and fast-growth businesses with accounting, tax and wider financial planning. We can help you review your R&D activity, understand the relevant costs and approach the claim with greater clarity.
Speak to AGILE Accountants about your R&D activity and find out what your business should consider before making a claim.
Frequently asked questions about R&D tax relief
Can a small company claim R&D tax relief?
Yes. A UK limited company may be able to claim R&D tax relief if it carries out qualifying research and development and meets the relevant scheme requirements.
How far back can you claim R&D tax relief?
R&D tax relief claims are generally subject to a two-year time limit from the end of the relevant accounting period, although specific notification rules may also apply.
