Research and Development tax credits are one of the most generous reliefs available to UK businesses, yet they remain widely unclaimed. Many business owners assume that R&D tax credits only apply to large technology companies or pharmaceutical businesses. A wide range of small and medium sized businesses carry out activities that qualify, often without realising it. This guide explains what R&D tax credits are, who can claim and how the process works.
What Are R&D Tax Credits?
R&D tax credits are a government incentive designed to encourage businesses to invest in innovation. They allow companies to reduce their Corporation Tax liability or, in some cases, claim a cash payment from HMRC by offsetting a proportion of the costs they have incurred on qualifying research and development activity.
The scheme is administered by HMRC and applies to limited companies that are liable for UK Corporation Tax. Sole traders and partnerships are not eligible under the main R&D relief scheme.
What Counts as R&D for Tax Purposes?
HMRC's definition of R&D for tax purposes is broader than many people expect. It does not require you to be conducting scientific research in a laboratory. The test is whether your work seeks to achieve an advance in science or technology by resolving scientific or technological uncertainty.
In practical terms, this can include:
- Developing new software, systems or processes
- Creating new or significantly improved products
- Solving technical problems that are not readily solvable by a competent professional in the field
- Developing new materials, components or manufacturing processes
- Trialling and testing new technical approaches where the outcome is uncertain
The key question is whether there was genuine scientific or technological uncertainty involved, that is, whether the answer was not readily available or deducible from existing knowledge.
What Costs Can You Claim Under R&D?
Not all costs associated with an R&D project are eligible for relief. HMRC allows claims on a specific set of qualifying expenditure, which includes:
- Staffing costs. Salaries, National Insurance and pension contributions for employees directly involved in the R&D work.
- Subcontractor costs. Payments to subcontractors who carry out R&D on your behalf, subject to certain conditions.
- Consumables. Materials and utilities used in the R&D process.
- Software. Software used directly in the R&D activity.
- Externally provided workers. Costs for agency workers engaged in qualifying R&D activities.
How Much Can You Claim?
The value of an R&D tax credit claim depends on the regime under which you are claiming, the level of qualifying expenditure and your company's tax position. Following reforms that came into effect in April 2024, most small and medium sized companies now claim under the merged R&D Expenditure Credit (RDEC) scheme, which provides a credit of 20% of qualifying expenditure. A separate scheme remains available for loss making Research and Development Intensive SMEs.
The actual benefit to your company will depend on your Corporation Tax rate and whether you have a tax liability against which to offset the credit. If you are loss making, a cash payment may still be available under certain conditions.
How to Make an R&D Claim
R&D tax credit claims are made through your Corporation Tax return (CT600). Since April 2023, all R&D claims must also be accompanied by an Additional Information Form submitted to HMRC before or at the same time as the Corporation Tax return. First time claimants must also notify HMRC of their intention to claim in advance.
The claim requires a clear description of the qualifying R&D activities and a breakdown of the eligible costs. HMRC scrutinises R&D claims carefully, so the quality of your documentation is important. Working with an experienced accountant significantly reduces the risk of a claim being challenged or rejected.
Do You Need an Accountant to Make an R&D Claim?
While there is no legal requirement to use an accountant, R&D tax credit claims have become increasingly complex following recent legislative changes. HMRC has strengthened its compliance activity in this area and the requirements around documentation, the Additional Information Form and advance notification make professional support highly advisable.
At Affinity Associates Isaacs & Co, we advise clients on R&D eligibility, help identify qualifying activities and costs and prepare robust, well documented claims that stand up to HMRC scrutiny. If you think your business might be carrying out qualifying R&D activity, get in touch for a no obligation assessment.