R&D Tax Credits Explained

A Guide to R&D Tax Credit Claims

Below is an introduction to claiming R&D Tax Credits. It includes the eligibility criteria for the scheme, the types of activities that qualify, how to calculate your claim and more. This guide will be useful to any company that is considering claiming R&D Tax Credits or wants to optimise its future claims.

Table of Contents

Click on the section you want to learn more about:

  1. Introduction
  2. Who is eligible to claim R&D Tax Credits?
  3. Costs that can be included in an R&D Tax Credit claim
  4. Costs that cannot be included in an R&D Tax Credit claim
  5. How to calculate an R&D Tax Credit claim
  6. When to Claim
  7. The R&D claims process
  8. Claim enquiries and disputes
  9. Additional facts and figures
  10. Frequently Asked Questions
  11. Conclusion


1. Introduction

The R&D tax credit scheme is a UK government scheme that rewards innovation in the private sector.

If you qualify, you can file an R&D Tax Credits claim each year. The benefit you will receive will be a percentage of your qualifying expenditure – how much you have spent on activities that are considered ‘R&D for tax purposes’ in that year.

There a few other things that can affect how your claim value is calculated and we explore these in more detail below. To skip ahead to the calculation section of this page, click here or visit our R&D Tax Credits calculator.

If your company is profitable, you can use your claim to reduce your company’s tax bill to a far higher degree than the usual deductions. If your company is loss-making (i.e. if it does not owe any tax for that year), your claim benefit can either take the form of additional losses that can be carried forward to future years, or the losses can be surrendered for an immediate cash benefit.

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2. Who Is Eligible to Claim R&D Tax Credits?

In order to make an R&D claim, your company must be subject to UK Corporation Tax. This typically means that it is registered in the UK as an LTD, PLC or CIC. But additionally, if a branch of an overseas company has a UK presence and is also subject to UK Corporation Tax, then it can also benefit from the scheme as can a partnership of limited companies.

Your eligible R&D activities do not necessarily need to take place in the UK 1 . However, the work in question does need to be funded (at least in part) by the UK-registered company. An example of this is a UK company that subcontracts some of its operations to a company that is based overseas.

1 Note: The rules around claiming for overseas R&D will change in April 2023. Read more on this topic here.

Your activities must meet two main conditions in order to be considered ‘R&D for tax purposes’:

2.1. Technological Advance

This means that the activity or project that you are claiming for should theoretically add to the pool of technical knowledge that is currently available in the industry. We say ‘theoretically’ because your activities and related IP will only be viewed by claim inspectors and won’t be released to the public during the claim process.

In practice, as well as gaining new knowledge, a technological advance can be achieved by developing something new or appreciably improving something that is already known in a field of science or technology. This could be the creation or improvement of a product, process or method. There is a misconception that the R&D tax credit scheme is only relevant to science-based sectors. This is simply not the case as eligible R&D work can take place in any sector, if the criteria are met.

Also, it is the processes involved in the work that count towards eligibility rather than the end-result. For example, if a company creates something that looks identical to an existing product on the market, but it used a new or improved method to make it, you would still be able to make a claim for that project.

2.2. Resolution of Technological Uncertainty

You meet this criterion when your solution to a technological problem is either not publicly available or readily deducible to a competent professional. In other words, the solution can’t be in the public domain and can’t be obvious. If others have achieved the same thing but it’s a trade secret or you are working in a unique environment, then your work can still qualify.

Therefore, in order for your project or activity to qualify, there should be some level of uncertainty about whether the project’s technology goals can be achieved or how to achieve them in practice.

This implies that the project presents a challenge that falls outside of the sector’s norms and there is a certain level of technical risk that exists in terms of the project’s viability at the outset. The project does not necessarily need to be a success by any measure to qualify. Again, it is the process that is looked at rather than the end result.

R&D tax credits eligibility

2.3. Examples of Eligible Activities by Sector

While you can claim in any sector and there are countless ways in which a company can qualify, we have compiled a brief list to give you a general sense of the activity-types that would typically qualify:

Manufacturing

  • Prototyping a new design
  • Materials testing
  • Making appreciable improvements to an existing product
  • Solving a technical problem to allow new product features or properties
  • Improving a manufacturing process

For more information visit our R&D tax credits for manufacturing page

Software Development

  • Using untested development methodologies or architectures
  • Connecting various systems that are not typically integrated with each other
  • Addressing challenging scalability or security issues
  • Creating new or more efficient algorithms
  • Developing software that processes large amounts of data
  • Developing firmware

For more information visit our R&D tax credits for software development page.

Architecture and Construction

  • Designing or building non-typical structures
  • Design, with special considerations to thermal performance
  • Retrofitting buildings with safety features to comply with new regulations
  • Designing in difficult or non-typical sites
  • Designing with special considerations to energy consumption, water conservation, emissions and other environmental concerns

To learn more, visit our R&D tax credits for architecture page.

Engineering

  • Projects relating to aerospace or avionics
  • Non-typical projects in civil engineering
  • Petroleum, Oil & Gas Engineering
  • Hydrology Engineering
  • Materials engineering
  • And others

To learn more, visit our R&D tax credits for engineering page

2.4. Eligibility Checklist

To get an idea of whether your company qualifies to claim R&D Tax Credits, ask the following questions. If the answer to any of these questions is “yes” then it is probably worth exploring whether your company is eligible:

  • Have you developed a new or significantly improved product, service or process?

  • Has your company implemented a project where the outcome was not certain because of technical constraints?

  • Has your company implemented a project that presented a technical challenge that is outside of the industry norm?

  • Has your company implemented a project that had unusual or significantly challenging environments, conditions or configurations?

  • Do you employ scientists, engineers, architects, software developers or technicians?

  • Have you developed any software in-house?

  • Are you a Small or Medium-sized Enterprise (SME) that has subcontracted out any of the above?

 

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3. Costs that can be included in an R&D Tax Credit Claim

You can include the following costs in a claim whenever they meet the criteria of advancement of knowledge and technological uncertainty:
To read more about eligibility criteria, you can skip to a previous section where we covered this.

  • Salaries of full-time or part-time staff members
  • Subcontractor costs (if the company is an SME)
  • Contract Workers
  • Consumables (e.g: water, gas, electricity, cost of prototypes not for sale)
  • Software License costs

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4. Costs that cannot be included in an R&D Tax Credit claim

Anything not on the list above, for example:

  • Normal operational costs (e.g. web hosting, office space rental, food and travel expenses etc.)
  • Pay-outs of dividends to shareholders
  • Recruitment costs, referral costs, even of R&D staff
  • Costs of staff who are not directly and actively engaged in the R&D
  • Costs of R&D staff where their time is not directly contributing to the resolution of technological uncertainty
  • Costs of items that are used in production
  • Hosting Costs

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5. How to Calculate an R&D Tax Credit Claim

There are two main types of R&D claims and each are calculated differently: If you have less than 500 employees and have a turnover of under £175,000,000 you would typically claim under the more lucrative SME Scheme. If you don’t meet both of the above conditions, you can still claim under the RDEC scheme.

Below are the various examples of how a claim value is calculated:

  1. SME Scheme calculation for a company that was profitable and spent £100,000 on qualifying R&D activities in a given year:
  • £100,000 x 130% (enhanced rate) = £130,000
  • £130,000 x 19% (corporation tax rate) = £24,700
  • Claim value: £24,700
  1. Updated SME Scheme calculation that will take effect in April 2023 due to the planned increase in Corporation Tax:
    (only applicable to companies with an annual profit of over £50,000):
  • £100,000 x 130% (enhanced rate) = £130,000
  • £130,000 x 25% (corporation tax rate after April 2023) = £32,500
  • Claim value: £32,500
  1. SME Scheme calculation for a company that was loss-making and spent £100,000 on qualifying R&D activities in a given year:
    • £100,000 x 130% (enhanced rate) = £130,000
    • £130,000 + £100,000 = £230,000 (enhanced expenditure)
    • £230,000 x 14.5% (surrender rate) = £33,350
    • Claim value: £33,350
  2. RDEC Scheme calculation that was either profit or loss making and spent £1,000,000 on qualifying R&D activities in a given year:
    • £1,000,000 x 12% = £120,000 (above the line credit)
    • £120,000 – 19% (corporation tax rate) = £97,200
    • Claim value: £97,200

There are further factors that can affect how a value of a claim is calculated. For example, if your company’s R&D is subcontracted to another company, you would only be able to include 65% of the subcontracted R&D costs. For more information on this, click here.

Find out your claim value by using our R&D tax credit calculator

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6. When to Claim

For any given year, you can submit your R&D claim at the end of your accounting period, when you submit your Corporation Tax return.

You can also submit separate claims for projects that you carried out in the previous two years. For example: If your company’s year-end is in December and the current date is November 2022, you can still submit claims for activities that took place in the years ending December 2021 and December 2020.

Since you would have already submitted your CT return for those years, you claim for those at any time.

In this scenario, after December 2022 the R&D benefit for activities that took place in the year ending December 2020 will be permanently lost so if you think that your company has eligible costs in the previous two years, let us know.

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7. The R&D Claims Process

If you’re thinking of making a claim, your first decision will be whether to use your in-house finance teams (this may even be you), external accountants, R&D tax specialists or a combination of these. There are pros and cons to each of these approaches. To make this decision, you should factor in:

  • The resources that you have available in the lead up to the year-end to manage the process
  • The confidence that you have in those resources to create an optimal claim. In other words, ask yourself which method will produce a claim that will yield the maximum value while carrying the minimum risk of an HMRC enquiry
  • Resources’ track record in claiming in a specific sector
  • Resources’ ability to defend claims if required

The claims process typically consists of the following actions:

  • Assessment and confirmation of eligibility
  • Collection of technical and financial information relating to eligible projects. E.G. time-sheets, payslips, invoice summaries, project plans etc.
  • Separation of time and costs of eligible and non-eligible activities within a project.
  • If relevant, review of contracts between company and subcontractors that helped to carry out the R&D to ensure that all contracts are in compliance with the scheme
  • Writing the claim narrative and preparation of claim documentation
  • Review of claim and submission of claim pack

If your claim is agreed, it will usually be paid out within 28 days of submission unless the case load of inspectors is particularly high or if the claim is queried or rejected.

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8. Claim Enquiries and Disputes

It’s worth noting that if you don’t follow best practices during preparation of an R&D claim of if you include something that breaches the legislative rules governing the scheme, this may trigger an HMRC enquiry.

An enquiry can range in severity from HMRC simply asking for additional information relating to a certain part of the claim, to them rejecting the claim outright.

In the worst case, HMRC can demand repayment of R&D funds (plus interest and penalties) that the company has claimed in previous years if they conclude that similar breaches were made in previous claims.

To find out more about how to avoid an HMRC enquiry, click here.

To learn more about best practices in data collection for R&D claims, click here.

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9. Additional Facts and Figures*

  • The average value of a claim in the SME and RDEC schemes is £53,876 and £272,881 respectively.
  • According to the latest available figures, UK companies claimed a total of £7.4 billion in the year ending March 2020, through the R&D tax credit scheme. This is a 19% increase from the previous year.
  • The number of claims in the year ending March 2020 rose by 16% from the previous year to 85,900. (the metric for 2016-17 and subsequent years is not available yet).
  • The 3 UK regions that claimed the highest benefit from the scheme in 2019-20 were London (31% of the total amount claimed), South East (18% of the total amount claimed) and the North West.
  • The 3 sectors that claimed the highest benefit from the scheme in 2019-20 were Manufacturing, Information & Communication and Professional, Scientific and Technical sectors

8.2. The amount of R&D benefit claimed in 2016-2017, by industry sector

Chart of R&D relief amount claimed by each sector

8.3. The number of R&D claims filed, by year

Number of R&D claims filed, by year

*Sources: gov.uk and thehrdirector.com

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10. Frequently Asked Questions

R&D tax relief is a benefit available to companies under the UK tax regime. If your company is attempting to develop or build something new or improved that  has technical challenges associated with it, then it may very well qualify for R&D relief.

Your company's project does not necessarily need to take place in a particular sector or even have a successful outcome but it must have a degree of ‘technological or scientific uncertainty’ that is resolved through your work. I.E. the technical staff either don't know what the solution is to a particular technical challenge, or how to achieve the solution in practice.

Click here to learn more about how to assess your company’s eligibility.

Your company's claim amount will depend on a number of factors with the most important one being the qualifying R&D expenditure - the amount your company has spent on qualifying R&D activities.

As a 'rule of thumb', a company meeting the definition of a Small or Medium Enterprise (SME), can claim back 24.7% of R&D expenditure if profit-making, and 33.35% if loss-making.

If a company cannot claim under the SME scheme, because for example, it doesn't meet the financial or criteria to be considered as an SME, or work has been subcontracted to it, it may still be able to claim Research & Development Expenditure Credits (RDEC) which is worth 11% of qualifying R&D expenditure.

Visit our calculation section to learn how to calculate your claim or simply visit our R&D Tax Credits calculator.

In most cases, yes. This would be considered to be subcontracted R&D. Note: You can only include 65% of any subcontractor’s qualifying expenditure in your claim.

Click here to read about this topic in detail.

Yes, the R&D work can take place anywhere in the world. In the majority of cases this would fall under the category of subcontracted R&D.

The definition of an SME for R&D tax purposes is an enterprise that employs 500 staff or less and that has an annual revenue of less than €100 million or a balance sheet of below €86 million. Otherwise your company is defined as a Large Enterprise.

Particular attention needs to be paid to subsidiaries or shareholders owning or controlling 25% or more, as their staff and financial figures may be aggregated with the claiming company for the purposes of the SME test.

Yes. You can claim retrospectively for two years going back from your company’s financial year-end. For example, if your next year-end is 31 December 2021, you have until that date to file a claim for qualifying activities that you carried out in the year ending 31 December 2019.

Our tried and tested process means that a claim usually takes no more than 28 days from start to finish. Once submitted, HMRC aim to review 95% of cases within 28 days of filing. We do not charge you a single penny until your claim payment has been received.

If you choose to do it yourself, it will entirely depend on the complexity of the claim, the resources you have available and how well versed you are in the rules governing the scheme.

One of the benefits of outsourcing the claims process to a reputable specialist R&D claims firm it greatly reduces the time that you and your team need to invest in the process. This means you can focus on managing your business, developing your products and carrying out R&D.

Innovation Plus’ own process typically requires no more than a half-day of technical resource time and the same on the financial side. If your records are in good shape, we frequently require less.

Yes, we routinely work with many of our clients’ finance teams. We are accustomed to working closely with both in-house accountants and external finance teams and are able to guide them through every aspect of the R&D claims process.

The entire Corporate Tax system works on the basis of self-assessment with HMRC in a compliance role, investigating high-risk claims, and additionally, randomly choosing to inspect other claims.

A few of the risk factors that can increase the risk of an HMRC enquiry are:

  • Claims prepared by someone without the required technical, legislative or financial knowledge.
  • Claims submitted by an agent who has a track record of 'getting it wrong'
  • Claims without supporting documentation showing how the claim has been made

By choosing to work with Innovation Plus, you will be minimising this risk. Since 2009, our team has prepared claims in a wide range of sectors, with some of the claims being highly complex. We always aim to secure the maximum amount for our clients  allowable within the legislation while avoiding the inclusion in a claim of anything not allowable.

You can read some of our success stories here.

It may appear so at first but in our experience, this approach can easily result in a significantly smaller claim, an HMRC enquiry or in the worst case an HMRC penalty. With a 25% penalty for careless overclaiming (and not taking the appropriate advice is considered  as careless by HMRC) any potential saving can be easily wiped out, as well as increasing the chance of future claims receiving additional scrutiny.

It takes specialist knowledge to prepare a claim that yields the highest amount while meeting the legislative criteria and avoiding any risk.

Additionally, how much is your time worth? Not using a specialist who understands both your technology and the tax law will mean that you or your staff end up having to write the relevant supporting documentation yourself, showing how the work claimed for complies with the legislation. This drain on valuable staff time will only be exacerbated if HMRC make further enquiries into the work carried out and request interviews with your technical staff.

It may do but not necessarily. It depends on what sort of grant it is. Grants that are notifiable state aids will preclude you from claiming R&D tax credits for any part of that project, but not for other projects. If you are in receipt of other types of grants, e.g. de minimis or FP7 then the grant-subsidised expenditure will not be claimable but other qualifying areas of the project will be.

Where a grant stops you from claiming R&D tax credits, you may be able to claim Research & Development Expenditure Credits (RDEC) instead which, although not as valuable, can still be worthwhile.

Usually this will be in the grant documentation that you sign. As part of our claims preparation process, we will review all your relevant grant documentation to ensure that your claim complies with the legislation.

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11. Conclusion

Although the R&D tax credit scheme remains an excellent way for companies to offset the expense of innovative activities, many companies miss out on significant annual claims each year due to a lack of awareness of the scheme or misconceptions about it.

This is particularly true for certain sectors. For example, in the year 2016-17 construction firms made a total of only 1,365 R&D claims despite there being an estimated 314,590 construction-based businesses in the UK.

If you would like to find out whether your own company is eligible to claim R&D tax credits or you would like more information about the scheme, we would be glad to help.

At the minimum we would be able to give you a definitive answer about your eligibility and give you an accurate idea of the potential value of your claim at no obligation to you.