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R&D Tax Incentive

What is R&D Tax Credits?

Research and development (R&D) tax credits area government incentive designed to reward UK companies for investing in innovation. They are a valuable source of cash for businesses to invest in accelerating their R&D, hiring new staff and ultimately growing.

R&D Tax Credits are a tax break put in place by the UK Government. They let you reclaim up to 33% of your R&D costs, even if your project failed.

In practice, SMEs both profitable and loss-making can get back up to 33% of the amount they’ve spent on qualifying R&D. Large companies can get up to 10% of their R&D refunded.

The money is paid as a corporation tax refund, or as a negative corporation tax, after the end of the financial year, tax free, and can be used for anything – hiring more developers, buying equipment, or even paying out dividends.


How do R&D tax credits work?

Companies that spend money developing new products, processes or services; or enhancing existing ones, are eligible for R&D tax relief. If you’re spending money on your innovation, you can make an R&D tax credit claim to receive either a cash payment and/or Corporation Tax reduction.

The scope for identifying R&D is huge – in fact, it exists in every single sector. And if you’re making a claim for the first time, you can typically claim R&D tax relief for your last two completed accounting periods.

Once the Calculation has been completed, it is submitted through a Tax Return, original or amended, giving you either a Tax Credit, Tax Refund or have the option to carry it forward to offset against future profits.

Is my business eligible for R&D tax credits?

To benefit from R&D tax incentives, you must:

Be a limited company in the UK that is subject to Corporation Tax.

Have carried out qualifying research and development activities.

Have spent money on these projects..

Who qualifies for R&D tax credits?

R&D can take place in any sector. It occurs in everything from cheese-making to chemical engineering, and construction to digital development.

A good test to determine if the work undertaken qualifies as R&D, is whether your project team faced uncertain outcomes at the start of the project.

That means that your team did not know from the outset whether a particular outcome was achievable. If you can show that your project goes beyond simply applying existing technologies, then you may be eligible to make a claim.

What costs qualify for R&D tax credits?

Staff, inlcuding salaries, employer’s NIC, person contributions and reimbursed expenses.

Subcontractors and freelancers. Materials and consumables including heat, light and power that are used up or transformed by the R&D process.

Some types of softwares.

Payments to the subjects of clinical trials.

R&D Tax Claims for SMEs

Small or medium-sized enterprise ( SME ) R&D tax relief allows companies to:

deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction.

claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss.

R&D Tax Claims for Large Companies

R&D expenditure credit (RDEC) replaced the large company scheme in April 2016.

RDEC can also be claimed by small and medium-sized enterprises (SMEs) who have been subcontracted to do R&D work by a large company or who have received a grant or subsidy for their R&D project.

The credit is calculated at 13% of your company’s qualifying R&D expenditure (this rate applies to expenditure incurred on or after 1 April 2020) and is taxable. Depending if your company is profit or loss making the credit may be used to discharge the liability or result in a cash payment.

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