Research and Development (R&D) tax credits

Research and development (R&D) tax credits are a form of tax relief to incentivise UK companies to invest in innovation.

They can either reduce the company’s tax bill, or a claim can be made to receive a tax credit based on the R&D expenditure.

R&D takes place when a project seeks to achieve an advance in science or technology. Recent legislation extends the definition to include advances in respect of pure mathematics. The activities which directly contribute to achieving this advancement through the resolution of scientific or technological uncertainty are R&D.

It is not just the traditional industries such as life sciences that undertake qualifying R&D. R&D can be undertaken in almost any industry and the definition of R&D is deliberately wide ranging.

What is qualifying R&D expenditure?

There are six main cost categories for R&D:

• Staff costs including salaries, employer’s NICs and pension contributions
• Subcontractor or freelance costs (SMEs only, unless the staff are from a qualifying body in which case can be included in RDEC)
• Expenditure on externally provided workers (for example, agency workers)
• Consumables (utilities and raw materials that are used or transformed by the R&D process)
• Some software costs
• In some cases, payments to clinical trial participants.

Relief rates for small and medium sized enterprises (SMEs)

The small and medium sized enterprise (SME) R&D tax credit claim provides a total deduction of 230% (pre-1 April 2023) on qualifying R&D expenditure. This deduction reduces the amount of taxable profits subject to tax.

From 1 April 2023, the 230% deduction reduces to 186%.

If a company does not have any taxable profits (i.e. there are losses during the year), the company can surrender the losses (up to the 230%/186% deduction) for a tax credit at 14.5% (pre-1 April 2023).

From 1 April 2023, the tax credit of 14.5% is reduced to 10%.

R&D intensive SMEs (SMEs where qualifying expenditure is at least 40% of their total expenditure) can continue to claim the SME credit rate at 14.5%.

To be eligible to make an SME R&D tax claim your business must meet certain criteria:

• be a UK registered trading company
• must not receive funding for its R&D activities (nor be the subcontractor for the R&D work
• meet the definition of an SME (see below)

SME definition

An SME is a company which ,together with any partner/linked enterprises:

• has less than 500 employees, and,
• one of the following conditions are satisfied:
  • turnover of less than €100m, or
  • balance sheet assets of less than €86m.

Relief rates for R&D Expenditure Credit (RDEC)

Your company may be eligible to make a ‘Large Company’ R&D claim (also known as an R&D Expenditure Credit claim) if any of the following apply:

• it does not meet the definition of an SME
• the company has received funding, or
• the work has been subcontracted to your company.

Additional Information Form (AIF)

From 8 August 2023, all companies are now required to submit an Additional Information Form (AIF) before submitting the company’s return with the R&D claim.

If the AIF form is not completed HMRC will remove the claim and no additional deduction will be allowed.

In addition to the above, HMRC also require a senior officer to put their name on the form and this individual will be responsible for the claim.

If you would like us to review whether your business can make an eligible claim, please let us know.