UK Companies are able to claim tax relief on R&D activity as part of a drive to boost innovation. Whereas historically there were schemes for SMEs and Large Organisations, for the accounting period beginning on and after 1 April 2024, there is a single scheme; however, there is additional support for the most R&D intensive firms.
HMRC R&D Tax Credits are a government scheme designed to help innovative UK businesses. Through Corporation Tax deductions or a cash payment, HMRC R&D tax credits reward investment in innovation and are a valuable source of funding for growth. The R&D regime has been historically misunderstood with many businesses thinking it is reserved for cutting-edge scientific research.
In fact, R&D tax credits are very generous, and are available for any activities that take a risk by attempting to ‘resolve scientific or technological uncertainties’. When it comes to claiming R&D tax relief, such activities include but are not limited to:
- Software development (e.g. apps)
- Product development (e.g. a new shampoo range)
- Scientific research (i.e. medical testing)
- Technological invention (i.e. battery or renewables technology)
- Improvement of existing software, products, or services
- Investment in failed products
- Improvement of internal processes
- Cloud computing and data expenditure
Determining whether innovation qualifies for the scheme, along with understanding what costs are eligible, can be complex.
The project must seek to resolve scientific or technological uncertainties.
This does not just include cutting-edge scientific research done in a laboratory, but also design and engineering work which involves overcoming difficult technological problems such as creating or making appreciable improvements to new processes, products, or services; software development; engineering design and new construction techniques across a whole range of industries.
The research and development does not need to be ‘novel’; if similar technology has already been developed but is not readily available (e.g. trade secret), then the R&D qualifies.
HMRC R&D guidance encourages us to consider:
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- Is there a project?
- Are you seeking an advance in a field of science or technology?
- Does the advance extend the overall knowledge or capability in the field of science and technology?
- Does the project involve an uncertainty that competent professionals cannot readily resolve and where solutions are not common knowledge? This is often shown through trial and error.
Any UK company that is subject to Corporation Tax (regardless of size or industry).
| R&D Intensive SME | All other Merged (“RDEC”) | |
| Who qualifies | Loss-making small or medium enterprises whose R&D expenditure constitutes at least 40% of total expenditure for costs incurred on or after 1 April 2023, or 30% for accounting periods beginning on or after 1 April 2024. | All Companies that are not R&D intensive regardless of size. |
| Claim Value | – 86% enhanced deduction. – Loss surrendered for 14.5% credit – Cash as a percentage of R&D spend 27% – Corporation tax saving of 21.5%. |
– 86% enhanced deduction. – 15% payable credit – Corporation tax saving of 15% |
A variety of costs directly attributable to the development project are eligible. These include:
- Salaries, NIC and pensions (apportioned for time directly attributable to the project). For overseas work, costs will qualify only if all the IP from the project is retained in the UK and profits from the overseas branch are taxed in the UK
- Subcontractors – R&D work and the cost of externally provided workers will be limited to work undertaken in the UK. Expenditure on overseas subcontractors and agency workers will only qualify if it is absolutely necessary for work to be done overseas for non-commercial reasons (i.e. geographical limitations and legal requirements).
- Consumables, including lighting and heating
- Some software
- Production of prototypes
- Trials
- Capital expenditure incurred for R&D purposes
- Travel and subsistence costs incurred by personnel while directly contributing to R&D (but only where costs were covered personally and reimbursed by the company).
- Costs of material consumed in the R&D process.
- Clinical trial volunteer costs. – to replace “Trials”
- Datasets and cloud computing
- Pure mathematics such as the development of new mathematical models.
Certain costs, such as production and trademarks are not eligible.
- Analyse your eligible expenditure and compute the amount eligible for HRMC R&D claims. A detailed review by an expert ensures that all eligible costs are captured and the claim is maximized.
- Insert the claim into your corporation tax return and submit to HMRC within 2 years of the balance sheet date
- In conjunction with your scientific/development staff, draft a report detailing how each project sought to resolve scientific and technological uncertainties. Careful drafting ensures the claim will succeed.
- The claim is accepted and HMRC will either make a cash payment or offset your tax liability.
Elemental’s experts will work with your development/research staff and financial controllers to identify qualifying projects and tabulate eligible costs. We quantify the claim and prepare a report to submit to HMRC to support the numerical analysis.
The rules are complicated. We keep the process simple. Contact us and see how we can help.
