R&D Tax Credits
Claiming research and development tax credits is a complex process. The Tax Cloud team has put together this easy guide to take you through the R&D Tax Credits scheme and how your company can make a claim.
The Research & Development (R&D) Tax Credits scheme was launched back in the early 2000s as a way of rewarding innovation and the development of cutting-edge technology in science and technology industries.
It’s a massive (and very valuable) incentive in that it provides a substantial tax rebate on eligible R&D costs. The credit in fact covers up to 33.35% of a company’s R&D spend, which is recovered either as a reduction in Corporation Tax or a cash repayment.
The total amount of R&D tax relief paid out in 2020 was a staggering £7.4 billion spread over 85,900 claims. This is an impressive 16% increase from 2019.
SMEs are able to claim up to 33p for every £1 spent on qualifying R&D activities. The average claim made by SMEs in the UK is £57,228
Large companies can claim via the RDEC scheme and can claim up to 11p for every £1 spent on qualifying R&D activities. The average RDEC claim in the UK is £632,931.
To understand the value of your potential R&D claim, click on the link below.
Any UK company may be eligible for R&D Tax Credits, regardless of size, industry or profitability. As long as it’s registered for UK Corporation Tax, and qualifying research and development activities have occurred, then a claim is likely.
Eligible R&D projects may include:
- Developing new products, services, or processes
- Significantly modifying or altering a product or service that already exists
Many businesses don’t realise that they are undertaking eligible qualifying activities. The scheme can be complicated to understand and qualifying activities can change regularly.
If your experienced technical lead (for example, the R&D manager, lead engineer, or lead developer) is struggling to overcome the technical challenges of your project – if they are scratching their head wondering how to proceed or losing sleep worrying about the technical uncertainties they face – your project will almost certainly qualify for R&D Tax Credits.
If you’re still unsure, you can always contact us and we can help you determine whether your activities qualify.
HMRC monitors and processes R&D tax relief claims. You can make a claim as far back as two accounting periods.
Although you don’t legally have to do one, the Tax Cloud team strongly recommends that an R&D technical report is produced as part of your claim. This serves to justify to HMRC inspectors what uncertainties were tackled and what scientific or technological advancement was made.
During the process of claiming through Tax Cloud, our team of specialists will also help you maximise your claim so no costs (and therefore relief) are accidentally left out. In fact, we have often been able to far exceed the claim value compared to claims that companies compile themselves.
R&D Tax Calculator
This R&D tax credits calculator will provide you with an estimate of the corporation tax savings that you may receive from HMRC following a claim for R&D tax relief.
How Tax Cloud can help you
- Two advisors for every claim
- Members of HMRC’s Research and Development Communication Forum
- SME & RDEC tax claim specialists
- We have a strong track record spanning 20+ years delivering R&D tax credit claims
- Our staff are trusted and respected advisors to our many innovative clients
- We help identify all of your qualifying projects and all your eligible expenses, including costs often missed by accountants and in-house teams.
- Our experts have delivered robust R&D claims for companies in manufacturing & engineering, pharmaceutical, software, supply chain, digital design, immersive technology and many more.
- No long term tie-in's (current period only)
- No face to face meetings required
- Auto generation of an HMRC compliant claim report
- No extra fee for chasing or responding to HMRC
- One portal that contains all your claim information
- Multiple team log-ins
- Xero Integration
Our team is proud of our proven success rate, and of the many tens of thousands of pounds we’ve helped put in the pockets of UK companies.
With many delighted clients supported, we’re trusted and respected in our industry. We also have a very high customer retention rate.
Tax Cloud brings about excellent results by ensuring no costs are left out and no money is left on the table. In certain cases, our team has actually managed to increase previous claims by 300%.
Our reputation is first class and we’re pleased to have delivered maximised R&D tax relief claims to companies in IT, software, digital design, communications, pharmaceutical, manufacturing & engineering, supply chain management, food and beverage, immersive technology and many more.
Tax Cloud FAQs
Businesses can submit an R&D Tax Credits claim at any time up to the first anniversary of the filing due date of the company tax return for the accounting period in which the claim is made (paragraph 83E(1) of Schedule 19 to the Finance Act 1998). This means that a business can make a claim for R&D tax relief going back two accounting years. The claim can be made in a company tax return or in an amendment to it.
Despite the huge success and generosity of this valuable tax incentive, so many businesses still don’t realise they can claim. We’ve even heard of accountants incorrectly telling clients their project won’t qualify. Some have even forgotten to tell them about the scheme altogether. This is a massive shame and a big missed opportunity.
Essentially, if your technical lead (the R&D manager, lead developer or lead engineer) is struggling to overcome the technical challenges your project presents then it will almost certainly qualify for R&D Tax Credits. This is particularly the case where experts in the field are also uncertain of the outcome.
If a claim is late, HMRC will follow guidance in their Statement of Practice SP 05/01 to deal with it. How successful the claim will then be depends on the facts of the case in hand. Having said that, it’s really rare that HMRC will allow a late claim based on not leaving enough time to complete or because you didn’t know about the scheme in the first place.
We therefore very strongly recommend submitting your claim for R&D Tax Credits on time. Again, this is where Tax Cloud is ideal, as you can work through it at your own pace and save/amend it as you go along.
When your claim is sent off, it’s reviewed and processed by one of the HMRC R&D specialist units. It’s normally the case that an HMRC Inspector will review the first claim that is made by a business. The Inspector will risk assess the claim, determining the level of review that will need to be made for any subsequent claims. If they have any questions or issues, they will then raise an enquiry. This will be sent to the applicant company in writing.
HMRC is within its right to investigate your company’s wider tax affairs if it’s considered necessary. This is why it’s crucially important to include an R&D technical narrative to help support your application, explaining your project(s) and costings.
Under the SME scheme, R&D expenditure cannot have been incurred by undertaking R&D as a subcontractor. If a ‘large company’ subcontracts its R&D to an SME, then the SME can make a tax credit claim, but only by using the larger company scheme (RDEC). Where successful, this will entitle the company to a 25% deduction for eligible R&D expenditure. Where the SME is making a claim under the Large Company Scheme, losses arising from that expenditure cannot be surrendered for a payable tax credit.
Where a grant has been received by a company to fund an R&D project, it can only then receive R&D Tax Credits using RDEC. Regardless of size, state aid prevents the company using the SME scheme.
This means if your company has received a grant that’s fairly small, it could actually lose money overall. So it’s always worth working out what is the best option for your company: The grant or state funding, or, being able to claim under the SME scheme for R&D Tax Credits.
It’s well worth discussing this with our team before you make a decision.
You will need to complete a Full Company Tax Return (CT600) and not a Short Company Tax Return.
SMEs should use CT600 (2015) Version 3 and complete the following boxes:
Box 650 - you need to put a tick in this box.
Box 660 - you need to insert the total enhanced R&D tax relief. This is the original R&D expenditure plus the additional enhanced R&D tax relief.
Box 656 - tick this box if you are claiming for accounting periods beginning on or after 1 April 2023 and you must separately complete the R&D claim notification form in some circumstances.
Box 657 - you need to put a tick in this box and separately complete the R&D Additional Information Form. The claim to R&D will be removed from the CT600 if the R&D Additional Information Form is not completed.
Box 530 - this should be filled out if you are claiming a tax credit payable amount.
Software projects in particular attract R&D tax relief claims. Example of projects include:
- Tools to extend the functionality of application software programs or of an operating system;
- State-of-the-art software for new projects, or new functionality for existing R&D projects;
- Extensions to database software, programming languages, or operating systems;
- Software development tools, such as tools to port data across platforms and tools for image processing or character recognition;
- Software to run new computer hardware, where the development is not straightforward or obvious;
- Means of integrating software and hardware platforms, where this requires a new method or process to be developed;
- Novel data management techniques, such as new object representations and new data structures;
- Software to run on devices with pre-installed operating systems, such as handheld GPS, tablets and mobile phones, where the development is not straightforward or obvious.
Engineering and manufacturing are also sectors that claim millions in R&D Tax Credits each year. Examples of qualifying projects include:
- Development of second generation or improved products;
- Innovative product development using CAD tools;
- Equipment and tooling fixture design and development;
- Designing and evaluating process alternatives;
- Designing innovative manufacturing equipment;
- Prototyping and three-dimensional solid modelling;
- Designing innovative programmable logic controllers;
- Designing and developing cost-effective and innovative operational processes;
- Integrating new materials to improve manufacturing processes and product performance;
- Evaluating and determining the most efficient flow of material;
- Designing, constructing, and testing product prototypes;
- Devising processes that would meet increasing regulatory requirements;
- Streamlining manufacturing processes via automation.
HMRC aims to process all R&D tax relief applications within 40 days. However, the exact amount of time it will take depends on the nature and complexity of the claim itself, and whether Inspectors have any questions.
Sometimes the time of year can make a difference too. Peak accounting times like December and March can slow things down a bit.
You can claim relief on costs that have been expensed through the Profit & Loss account. In certain circumstances you can also claim capitalised expenditure (as long as the assets purchased have been classified as Intangible Assets).
The main areas of costs that can be claimed are:
- Staff costs (including gross pay, employer's NI, reimbursed expenses and employer's pension contributions);
- Software license costs;
- Externally Provided Workers, freelancers and subcontractors;
- Consumables used up in the actual project itself (heat, light and power, and materials and equipment used or transformed by the R&D process);
- Payments made to volunteers for clinical studies;
- Cloud computing costs, including storage, for accounting periods beginning on or after 1 April 2023;
- Data licence costs, for accounting periods beginning on or after 1 April 2023.
People from all over a business are likely to play their part in an R&D project. Therefore, your R&D team could include an R&D Manager, a Lead Developer, Project Co-ordinators, Engineers, CAD Engineers, Cost Accountants, Quality Control and Testing specialists, as well as members of the senior management team.
Absolutely! In fact, the Tax Cloud portal was designed exactly for smaller businesses representing excellent value for money.
Thanks to R&D Tax Credits, profitable SMEs are able to reduce the amount of corporation tax they pay on profits for the period, by the amount of the enhanced deduction.
The current R&D Tax Credits rate brings about a 21.5% benefit on R&D expenditure for profit-making SMEs. If the deduction is more than the profit an SME has made in that period, then this will create a loss for Corporation Tax purposes.
Loss-making SMEs are still welcome to claim R&D Tax Credits. Where the additional enhanced R&D deduction is more than the SME’s taxable profit for the relevant accounting period then this creates a loss for corporation tax purposes.
The SME can then decide to go down one of these three routes:
- Carry the loss forward and offset against future profits;
- Carry back the loss to the previous accounting period (if there was a taxable profit);
- Surrender the loss (either partially or fully) to HMRC in return for a payable R&D tax credit.
The company can surrender the lower of the enhanced R&D relief or the taxable losses for the period.
The losses are surrendered for a cash credit (tax credit payable) and the current rate is 10%. So as the enhanced R&D tax relief is 86% a cash credit can be worth as much as 18.6p for each £1 of qualifying R&D expenditure.
Introduced on 1st April 2013, the Research and Development Expenditure Credit (RDEC) replaced the original Large Company scheme entirely on 1st April 2016.
The main difference between the RDEC and the old Large Company scheme is that loss-making companies can now receive a payable tax credit.
RDEC is paid net of tax to companies with no corporation tax liability and is a taxable receipt. The current RDEC rate is 20%.