How do I claim R&D tax credits?

Accountancy: Rickard Luckin

Since launching in 2000, the scheme has paid over £35bn to companies working across different sectors. Now, however, you must take care because HMRC is cracking down on fraud and error.

The relief currently allows businesses to claim a tax rebate of up to 33.35% on qualifying costs linked to innovation. From April 2023, this will reduce slightly. However, claims can be made up to two years after the end of an accounting period, so it’s still possible to receive the higher rate of relief until 31 March 2025, for expenditure incurred before 1 April 2023.

Tax credits can reduce corporation tax liability, or be payable as a cash payment. While it is valuable, it is important to understand whether your company qualifies before making a claim.

Does my business qualify for R&D tax credits?

Paying technical people to solve problems, including developing new or improved processes, products, or software, might mean you are eligible for R&D tax credits.

Although the scheme is open to all UK companies in any industry or size, the company must be subject to corporation tax. Additionally, the R&D must satisfy the legal definition of ‘eligible R&D’ for tax purposes.

How do R&D tax credits work?

R&D tax credits can be either a cash payment for loss-making companies, or a corporation tax reduction for profit-making companies. The relief is proportional to the amount you have spent on R&D.

How much are R&D tax credits worth?

There are two main R&D tax relief schemes: The SME scheme and RDEC (Research and Development Expenditure Credit).

Firms applying for R&D tax credits using the SME scheme must have fewer than 500 employees and have either an annual turnover of no more than €100 million, or a balance sheet under €86 million. Additionally, there are further requirements, such as the R&D cannot be subsidised by any other party (including receiving specific grants).  

Which costs can I claim R&D tax relief on?

To qualify for R&D tax credits, your project must relate to your trade (current or future), attempt to achieve an overall advance or appreciable improvement in science or technology, try to resolve technological or scientific uncertainty, and achieve something not easily worked out by a competent professional in the field.

For each project, you can claim the associated costs under specific headings, such as staff costs, subcontractors (only for the SME scheme), consumables, software, and externally provided workers.

Is there anything else I need to know?

HMRC polices the R&D scheme as it believes there are hundreds of millions of pounds of errors. This means HMRC checks claims closely. It’s important to ensure you have adequate records, can explain what the R&D is, and link the expenditure to the R&D activity.

A professional adviser should be able to help you identify whether you can make a claim, which costs you should include, and assist you should HMRC want more detail.