R&D Tax Credits - What you need to know

Sam Palmer, Manager for Lovewell Blake
Sam Palmer, Manager for Lovewell Blake

Research and development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation. They are a valuable source of cash for businesses to invest in accelerating their R&D, hiring new staff, and ultimately growing.

Not just lab coats and microscopes

The government’s R&D criteria are purposefully broad. Whatever the size or sector, if your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you may be carrying out qualifying activity. This could include;

  • Developing new products
  • Creating additional processes
  • Enhancing existing services

If you’re incurring qualifying costs on your innovation, you can make an R&D tax credit claim to receive either a cash payment and/or Corporation Tax reduction. 

Key sectors and examples 

  • Software development - Development of new programming techniques and algorithms in order to achieve a technological advance.
  • Manufacturing and engineering - New process development to improve efficiency or increase output.
  • Construction and architecture - Development and application of new or unusual building materials and novel construction techniques. 
  • Food production - Trialling different methodologies for feeding livestock to enhance output.
  • Renewables - New methods of harnessing or storing renewable energy.
  • Marine - New propulsion system or hull form design, possibly leading to increased performance characteristics. 
  • Chemical, life sciences and healthcare - Development of a manufacturing process for clinical trials of a new cell therapy. 

These examples are for illustration only. There are numerous other projects that could qualify.

How does R&D tax relief work?

R&D tax reliefs are made up of two schemes: SME R&D Tax Relief and the Research and Development Expenditure Credit, also known as the “RDEC.”

As the name suggests, SME R&D Tax Relief supports smaller businesses, from start-ups through to medium companies.

The RDEC supports larger businesses, as well as some smaller companies’ ineligible for the SME scheme.

Whichever reliefs are claimed, they are available to a wide range of costs incurred while ‘advancing science or technology’ by resolving ‘scientific or technological uncertainties.’ While this sounds restrictive, such costs are often incurred while producing new products, services or processes, or while modifying existing ones, and claims can include: 

  • Staffing costs
  • Subcontracted R&D
  • Externally Provided Workers (EPWs)
  • Software
  • Consumables and materials 
  • Payments to participants in clinical trials 

SME R&D Tax Relief Eligibility

To claim R&D Tax Credits using the SME scheme, companies must:

  • Employ no more than 500 members of staff
  • Have a turnover of under €100m
  • Have a balance sheet total under €86m

The SME scheme allows profitable companies falling within these limits to deduct an extra 86% of their eligible R&D expenditure from their taxable profit.  

This is over and above the standard 100% deduction which means a 186% tax deduction in total. 

For loss making companies, a claim can be made to surrender the loss and reclaim a tax credit of 10% of that loss.

SME R&D Tax Relief Example

Company A made a £500,000 profit in the year to 31 March 2023, and has paid corporation tax of £125,000 (@25%). 

Company A had £200,000 of qualifying R&D expenditure in the period. 

Qualifying R&D expenditure£200,000
Enhanced R&D deduction (86%)£172,000
Total deduction£372,000

A tax refund of £43,000 is due. 

Research and Development Expenditure Credit (“RDEC”)

Designed to allow larger companies to benefit through a cash payment or a reduction in their tax liability.

The RDEC provides larger, loss-making companies the ability to claim back 20% of their eligible R&D expenditure as a repayment from HMRC. 

If an SME cannot claim using the SME scheme because:

  • Some of their expenditure has been subsidised
  • They are completing directed and subcontracted R&D on behalf of another business
  • Their project is in receipt of a grant which is classified as notifiable state aid

The company can make a claim under the large company scheme instead.

RDEC Example

Company B had £1,000,000 of qualifying R&D expenditure in the period. 

£1,000,000 @ 20% = £200,000 (above the line credit)

Gross credit amount = £200,000

£200,000 less 25% Corporation Tax (main rate applicable to accounting period) = £150,000 

Net repayment due to the company is £150,000

Changes from April 2024 – the ‘merged scheme’

The current SME and RDEC R&D schemes have merged (with effect of 1 April 2024) into one above the line credit scheme which broadly follows the current RDEC scheme, with a headline rate of relief of 20%.

The 20% credit is taxable, meaning a net benefit of 15% of qualifying expenditure for claimants paying the 25% main rate of corporation tax. For those paying tax at the 19% small companies’ rate or in a tax loss position, the net benefit is 16.2%.

The merged scheme will take effect for accounting periods beginning on or after 1 April 2024 and run alongside the SME R&D intensive scheme. 

CompanyMerged schemeSME intensive scheme
Loss making SME16.2%n/a
Profit making SMEUp to 16.2%n/a
R&D intensive' SMEn/aUp to 27%
Large companyUp to 16.2%n/a

Other changes

  • The subcontracted expenditure rules are significantly changed. Broadly, relief is available to the company that takes the decision to initiate the R&D and bears the risk of failure.
  • The existing subsidised expenditure rules for SMEs are removed entirely.
  • New overseas expenditure restrictions mean that companies subcontracting R&D activity to third-parties can generally only claim relief if that activity is performed in the UK.
  • Similarly, companies utilising externally provided workers can usually only claim relief where they are paid through a UK payroll. Exceptions exist for situations where it is ‘wholly unreasonable’ or impossible to undertake the required activities in the UK.
  • A PAYE/National Insurance contributions cap on claims is retained, adopting the more generous rules from the existing SME regime.
  • For claims submitted after 31 March 2024, claimant companies can no longer nominate third-parties to receive payable R&D tax credits.

Next Steps

In order to maximise and verify the validity of your R&D claim, we recommend speaking with an R&D tax specialist to ensure you're maximising the tax relief available.

We support clients in building R&D tax relief claims that are maximised, complete and credible.

If you need assistance with R&D tax credits, or other larger business tax services, then get in contact to see how Lovewell Blake can help  

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