Research and development tax credits

R&D tax credits is a scheme introduced by the government to encourage innovation and investment in science and technology. 

Under the scheme, small and medium-sized enterprises (SMEs) are given tax breaks for carrying out R&D activities. This is not to be confused with the R&D Expenditure Credit (RDEC), which is for large corporations. 

The initiative allows companies to:

• recover up to 33% on the costs they’ve spent on R&D whether they’re profitable or loss-making  

• recover up to 14.5% of the ‘surrenderable loss’ if they’re loss-making and opted for a cash repayment 

The repayment can be in the form of a corporation tax reduction, a cash payment or a combination of both. How you’ll receive your tax credits depends on whether your company was making a profit or loss. 

To be eligible for the relief, your company must:

1. be a limited company registered for corporation tax

2. be an SME, and 

3. have carried out and spent money on R&D work

Under the SME scheme, your company is an SME if it:

• has less than 500 employees 

• has either an annual turnover of less than €100 million or a balance sheet under €86 million

When determining whether your business is an SME, you need to take the figures of any ‘connected’ or ‘partner’ companies into account. These refer to external investors that are companies which:

• either you hold 50% of the voting rights in or they hold 50% of voting rights in your company (known as connected companies)

• either you hold 25% of the voting rights or capital in or they hold 25% of the voting rights or capital in your company

If your company is part of or has been bought out by a large company (ie one that falls outside the definition above), then you will not be eligible. 

Your business’ eligibility may also be affected if you’re receiving subsidies or grants or if you’re part of a subcontracting contract. If you’re already receiving state aid or you’re a subcontractor, you wouldn’t be able to apply for this relief. However, you may apply for the RDEC.

To qualify for R&D tax credits, your project:

• doesn’t need to be successful

• must be seeking to advance science and technology  (ie to increase the overall knowledge or capacity of the field) 

• must be related to your company’s trade

• must involve an uncertainty that can’t be easily solved by a professional and there are no publicly known solutions

Essentially your project will likely qualify for R&D relief if it tackles an issue in the scientific or technological field, and the solution is unclear and not widely known to experts in that field. 

As such, a project that researches or develops an entirely new product, process or service is considered as R&D. So does a project that seeks to improve an existing product, process or service. 

A project that involves an advancement that’s already been achieved may still be categorised as R&D if the details of the advance aren’t public knowledge.

Certain indirect actions that contribute to scientific or technological advancement can also be classified as R&D. This includes maintaining R&D equipment or training staff on particular R&D techniques.

You’re allowed to make a claim for any qualifying R&D expenditure incurred from the start to the end of your project. 

Generally, you can claim relief on day-to-day operational costs but not capital expenditure (eg money spent on renting your office space) or costs for product distribution. 

Expenses that can be claimed include:

• direct R&D employee costs, including salaries, national insurance and pension fund contributions 

• costs of consumables ie materials and resources that are used during the R&D process

• software costs ie expenses on software that are necessary for the R&D process

• subcontractor costs ie the amount paid for subcontracted R&D work 

For more information, read the HMRC’s guide on Costs you can claim.

R&D starts when work to resolve the problem identified begins. The project ends when you’ve developed or discovered a solution. Or if you’ve decided to put an end to it. 

R&D work can also take place after the project has formally ended. This occurs when a new issue arises during the production of your prototype or after it has been put into use. 

However, mere design tweaks or routine repairs wouldn’t qualify as R&D work. When determining whether a new project is considered as R&D, you should involve those that are working on it. Emphasis should be placed on what advancements the project is seeking to achieve in the field.

There is no separate application for the relief. You can make a claim by entering the R&D tax relief (known as ‘R&D enhanced expenditure’) you’ve calculated into the Company Tax Return form. 

After submitting the form, you can then use the HMRC’s online service to provide the Government with further details to support your claim. 

You can make a backdated claim for R&D relief going back 2 accounting periods.

Get your R&D enhanced expenditure by following these steps:

1. Identify the costs associated with the R&D project (note: you’re only allowed to claim 65% of the payments you’ve made to subcontractors or agency staff)

2. Add all the costs together to arrive at your total qualifying expenditure (TQE)

3. Multiply your TQE by 130% to get the tax credit value of your R&D expenditure

4. Add the value to your TQE 

To calculate your corporation tax savings:

1. Multiply your overall taxable profit by the corporation tax rate ie 19% (this is your original tax liability)

2. Reduce your tax credit value (calculated above) from your overall taxable profit to arrive at your adjusted taxable profit

3. Multiply the adjusted profit by 19% (this is your adjusted tax liability)

4. Deduct your adjusted tax liability from your original tax liability

If your company is trading at a loss, you can ‘surrender’ your R&D loss in exchange for a cash payment. 

Your surrenderable loss is the lower of:

• the total trading loss suffered by your company (this is calculated by adding your R&D expenditure to your trading losses and deducting any relief obtained) or 

• 230% of your R&D expenditure