Research & Development (R&D) tax reliefs – what you need to know

Research & Development tax reliefs can provide valuable financial support if your business is investing in developing new processes, products or services by effectively subsidising your R&D costs. They could also open access to more tax relief through the patent box scheme.  

What is R&D? 

The main criteria for a project to qualify as R&D is that the work was carried out to try to advance science or technology through the resolution of scientific or technological uncertainties. The rules are set out in the DSIT guidelines, and in October 2023, HMRC published newGuidelines for Compliance setting out types of evidence you will need to provide to prove you are carrying out qualifying R&D. 

Why this is important for your business 

The claims rules are enshrined in UK tax law and are enforced by HMRC, who have hundreds of caseworkers reviewing claims. It is critical that when your company claims, you are correct in doing so and for the right number. If your company claims either in error or for the wrong amount, UK tax law means penalties and interest will be charged. 

If HMRC have challenged your claim, our specialist R&D and Tax Dispute Resolution teams can work hand in hand with your technical teams to test and validate your claim. It is best to come to a resolution with HMRC before the dispute escalates into other areas of your tax compliance. For help and advice please contact Carrie Rutland or Dawn Register, or read more about our R&D HMRC Enquiry Resolution services. 

Does your R&D project qualify?  

Identifying qualifying R&D activity requires substantial technical expertise and experience of the UK’s R&D rules. Our R&D team have backgrounds in science and technology from a wide range of business sectors and can help with the detailed technical assessment and write up the narratives that you will need to send to HMRC. Make sure your claims are valid - Get in touch 

What R&D tax relief is available?  

The amount of tax relief that you can qualify for depends on which of the R&D relief scheme/s you qualify for, and when the R&D costs were incurred. The Government has made many changes to the UK’s R&D schemes in the last few years, but you can check which scheme you may qualify for below: 

SME scheme up to 1 April 2024 and R&D intensive scheme

R&D Expenditure Credit (RDEC) and merged scheme from 1 April 2024 
 

The relief is given as reduction in your corporate tax bill or a repayable credit – depending on which scheme you qualify under. As part of the changes to the schemes, the Government announced changes to the rates of relief in the past few Autumn Statements and Budgets – the position for recent tax years and accounting periods is shown in the table below: 

 

	SME SCHEME		RDEC SCHEME		MERGED SCHEME
	Up to 31/03/2023	From 01/04/2023	Up to 31/03/2023	From 01/04/2023	APs starting after 01/04/2024
Profitable company	130% uplift on costs = 24.7% net benefit	86% uplift on costs = 21.5% net benefit	Headline rate 13% = 10.5% post tax	Headline rate 20% = post tax rate between 15% - 16.2%*	Headline rate 20% = post tax rate between 15% or 16.2%*
Loss making company ***	Costs plus 130% uplift = 230 x 14.5% repayable credit = 33.4% subsidy	Costs plus 86% uplift = 186 x 10% repayable credit = 18.6% subsidy	10.5% subsidy	15% subsidy	16.2% subsidy
Loss making R&D intensive company (aka ERIS)**	NA	Costs plus 86% uplift = 186 x 14.5% repayable credit = 26.97% subsidy	NA	NA	NA

 
* The post-tax RDEC/Merged scheme rates from 1 April 2023 will vary depending on the level of taxable profits a company has and, therefore, the corporation tax rate applied to those profits. The Net RDEC at the main rate of corporation tax (25%) is 15%, for the small companies’ rate (19%) it is 16.2%.  
 
**Loss-making R&D intensive companies are those whose qualifying R&D expenditure constitutes at least 40% (from 1 April 2023) or 30% (from accounting periods starting on or after 1 April 2024) of total expenditure (splitting accounting periods as required). Total expenditure for this purpose will be calculated from the total expenses figure in the profit and loss (P&L) account, pre-trading expenditure, adjusted by adding any amount of expenditure claimed under s1308 Corporation Tax Act (CTA) 2009. 

***Loss-making companies generally are liable to a notional tax rate at the small profits rate of 19%. Thus, the net effect of the calculation will give R&D relief to loss-making companies of 16.2p for every £1 of qualifying spend, profitable ones will get effective relief at 15p in the £ (16.2p for companies paying the small companies rate). 
 
There are apportionment rules covering those accounting periods that straddle 1 April. 

When can you claim R&D tax credits? 

As a claim comprises part of your tax return, the basic position is that it must be made within one year after the end of your accounting period. A further 12 months is then granted to amend your return, and a claim can either be made or amended during this extended period. 

However, if you are intending to make a claim, you must comply with the new claim notification process.

If R&D activities have been contracted out to you or by you, there are a host of new rules to consider arising from the new merged scheme.

Which costs qualify for R&D tax relief? 

Assuming the R&D activities can be claimed by you, you will need to identify and track eligible. 

The most clear-cut costs are those incurred on qualifying activities i.e. those directly related to the R&D. It is, however, also possible to consider costs that are indirectly related to the R&D e.g. recruitment costs. All costs must have been tax deductible business costs and not capital costs. If the costs are capital, like plant and machinery or buildings, these should not be included in your R&D claim and capital allowances should be considered. There is a 100% first year deduction known as Research & Development Allowances for capital expenditure. 

Generally, the most relevant type of costs are staff costs - salaries, employer National Insurance Contributions (NIC) and employer pension contributions, although other types of “time-based” costs such as certain sub-contractors or group recharges can also be allowed. Non-time-based eligible costs can include consumables, energy, software licences, cloud computing and data feeds. 

Where the R&D work is carried out is also relevant for your claim. For accounting periods starting on or after 1 April 2024, the new merged R&D scheme rules are relevant and, subject to some limited exceptions, non-UK costs will generally no longer qualify. 
 

How tax relief is calculated and allocated for the merged scheme (and for remaining RDEC claims) 

There is a seven-step process:  

1. First it is used to pay any Corporation Tax for the accounting period (gross credit against the tax due). 
2. Calculate the net of tax amount. HMRC will only repay in cash the net amount of the credit (i.e. the gross credit less Corporation Tax), so if the amount remaining after step 1 exceeds this, the balance is carried forward to use in future periods. 
3. The payment of any credit is also subject to a ‘cap’ based on the PAYE and NIC the company has paid to HMRC. This was limited to the PAYE and NIC paid in respect of R&D workers prior to 1 April 2024, but for the [current rules], this is based on a multiple of the company’s total PAYE and NIC paid (see below) – again any excess can be carried forward for use in future periods. 
4. Allocate against Corporation Tax liability due for other accounting periods. 
5. Elect whether to surrender for group relief. At this stage you may choose to surrender any remaining credit to another company in your group to use against its tax liability, although this is not mandatory.  
6. Allocate any remaining credit against the claimant company’s other tax liabilities – for example, outstanding VAT or overdue PAYE – this is an automatic step applied by HMRC. 
7. Remaining credit can be paid direct to the company. 

Different calculation rules apply for relief under the R&D intensive loss-making scheme.

Capping relief for loss making companies 

All the UK’s R&D relief schemes apply a cap on the relief available to loss making companies (see step 3 above). The PAYE/NIC cap rules from the old SME scheme were the most generous, and these have been adopted for the merged scheme and the R&D intensive loss-making scheme.  

The amount of payable R&D tax credit that a company can receive is capped at £20,000 plus 300% of its total Pay as you Earn (PAYE) and NIC liability for the period. However, a company is exempt from the cap if:  

• Its employees are creating, preparing to create, or managing Intellectual Property (IP) and  
• It does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to connected parties; or on the provision of externally provided workers (EPWs) by connected parties.  

The above is apportioned where relevant for periods more or less than 12 months.

 

Help to make your R&D claim 

Our team has extensive experience in helping all types of businesses across a wide range of sectors make successful R&D claims. Whatever stage you have reached with your R&D – from project design, to compiling a claim or facing an HMRC enquiry into your claim we can help. For expert support - Get in touch.