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- Research & Development Tax Reliefs: At a glance
What's Research and Development (R&D) relief? How to claim R&D relief? How does small company R&D relief work? Can individuals claim R&D relief?
Qualifying expenditure on Research and Development (R&D) attracts four different forms of tax relief for Corporation Tax.
- The Small or Medium-sized Enterprise (SME) R&D Credits Scheme.
- The Large Company Scheme: R&D Expenditure Credit (RDEC).
- The Patent Box.
Additionally, there are R&D capital allowances.
R&D information on this site is split into freeview guides, guides for subscribers of www.rossmartin.co.uk and our premium content R&D Zone. Subscribers, click here for your detailed version of this guide.
At a glance
At a glance
This note focuses on relief for SMEs, although noting that the large company scheme applies to SMEs in certain circumstances (see Subscriber version for large companies).
Click here for Patent Box.
R&D relief is given in two different ways, by enhanced deduction or by payable credit.
The amount of relief given depends on when the R&D expenditure was incurred:
|
Relief |
From 1 April 2020 | From 1 Jan 2018 | From 1 April 2015 | From 1 April 2014 | From 1 April 2013 |
1 April 2011 to 31 March 2012 |
|
Enhanced deduction rate |
230% | 230% |
230% |
225% |
225% |
200% |
|
Payable credit* |
14.5% | 14.5% |
14.5% |
14.5% |
11% |
12.5% |
|
Above the line expenditure credit (RDEC) |
13% | 12% |
11% |
10% |
9.1% |
* The payable credit is subject to a cap from 1 April 2021.
In order to claim relief, a company must have been engaged in qualifying R&D activity and then satisfy a number of specific conditions.
- The company must be a going concern.
- Any single R&D project must not receive total aid of more than €7.5m.
Special rules and conditions
- There are special rules if a company has received state aid in respect of the project.
- Expenditure is not generally available if it has been subsidised.
- There are special rules for contracting and sub-contracting R&D.
- See R&D subscriber guide for details of how to make claims.
To claim relief:
- An R&D report should be submitted along with the company tax return as part of the tax computation.
- It is helpful that the principal activities statement to the accounts should state that R&D work is part of the company’s business activities.
Until 31 March 2012, the company must have incurred a minimum of £10,000 of qualifying expenditure on R&D projects (this requirement is removed from 1 April 2012).
Vaccines - restriction
The deduction available under Vaccine Research Relief for SMEs was removed from 1 April 2012 and the relief was completely abolished by Finance Act 2016 with effect from 1 April 2017.
What's new?
Increase in the R&D Expenditure Credit
The repayable Expenditure Credit increased to 13% from 1 April 2020, see RDEC Scheme.
Preventing abuse of R&D relief by SME's
Following two consultations, the government has introduced a cap on any claims for payable credits from 1 April 2021.
- There will be a threshold of £20,000 under which the cap will not apply.
- The cap will be the threshold amount plus three times the company’s total PAYE and National Insurance Contributions (NICs) liability for that year.
- Some related party PAYE and NICs will be taken into account for the cap calculation.
- There will be an exemption for genuine R&D businesses.
Past changes
- From 1 January 2018, the repayable Expenditure Credit is increased to 12%.
- From 1 April 2016, only the RDEC is available for claims under the Large Company Scheme.
- In November 2015 HMRC introduced an R&D Advance Assurance scheme for companies claiming R&D for the first time. Where assurance is given, the company will face no further enquiries into its claims for the first three accounting periods.
- From 1 August 2015 universities and charities are prevented from claiming R&D expenditure credit on their own research or when working as a contractor.
- From 1 April 2015:
- The R&D tax credit for small and medium-sized companies increased from 225% to 230%.
- The 'above the line' credit for large companies increases from 10% to 11%.
- R&D and consumables: where R&D activity results in goods or services sold in the normal course of a company’s business, the cost of consumable items reflected in those goods or services will not attract R&D tax credits.
Overview and FAQs
From 1 April 2015, SME companies that have incurred costs on qualifying R&D projects can obtain an uplift on these costs of 230%. It means that if a company spends £100, it will receive tax relief as if it had spent £230. Prior to 1 April 2015 the rate was 225% (see Rates in At a glance).
Where a company has unrelieved trading losses it may surrender the R&D tax relief in exchange for a tax credit.
- For periods up to 31 March 2012 the credit cannot exceed the company’s PAYE tax and NIC actually paid in the accounting period and where there are outstanding tax or NI liabilities, the credit will be offset against these before any balance being refunded.
- After 1 April 2012, the PAYE/NICs restriction no longer applies.
A claim for R&D must be made within two years of the end of the accounting period in which the costs were recognised.
What is an SME?
Since August 2008 the definition of an SME is taken as a company with fewer than 500 employees and a turnover limit of €100 million or a balance sheet total not exceeding €86 million. Prior to this, the thresholds were €250, €50 million and €43 million respectively.
Definition of R&D
R&D is defined in accordance with general accounting practice but is further modified by the guidelines produced by the Department of Trade and Industry (DTI) in 2004. In general, there must be uncertainty that the final objective can be achieved and there must be an advance in science or technology through the resolution of scientific or technological uncertainty. The knowledge being sought must also not be already available in the public domain.
Qualifying costs
The company must have incurred qualifying expenditure on R&D projects.
Government grant funding (notified state aid) provided for R&D projects must be excluded from any R&D claim. An SME may claim enhanced relief under the large company R&D scheme, currently at 130%. Where other grants or subsidies have been received, the SME relief may be claimed on the net amount. Relief under the large company scheme may be claimed on the subsidised expenditure, provided it qualifies as tax-deductible in the normal way. From 1 April 2016, the uplift in costs can no longer be claimed. Only the repayable Expenditure Credit is available (see the Subscriber version for details of the Large Company Scheme).
Qualifying costs must have been incurred and cannot be of a capital nature. Revenue costs that have been put to the balance sheet can still be included within the R&D Claim. Capital costs relating to R&D work qualify for capital allowances at 100%.
Qualifying revenue costs include:
- Staff costs apportioned, see Subscriber guide to R&D: Staffing costs.
- Materials consumed or transformed.
- Water and fuel.
- Specially commissioned parts.
- Software.
- Software designed or adapted see R&D software.
- Subcontractor costs: there are a number of pitfalls and planning points in relation to staffing and subcontractors, these are discussed at length in the Subscriber guide: R&D: Contractor costs.
- A proportion of variable overheads, see R&D claims and overheads.
From 1 April 2015, there is a restriction on expenditure in respect of consumable items that qualify for R&D tax credits where the company sells the products of its R&D activity as part of its normal business.
The R&D report
A report should be filed as part of the company tax return as it is current HM Revenue Customs (HMRC) practice to open an enquiry where no report is supplied.
- See Subscriber version for details and links to templates.
Where a company has been contracted to carry out R&D work and cannot make a claim under the SME rules, it may be possible to claim under the large company rules. Where this applies, the uplift in costs up to April 2016 is 130% and any trading losses cannot be surrendered in exchange for a tax credit. From 1 April 2016, the uplift in costs can no longer be claimed. Only the repayable Expenditure Credit is available (see Subscriber version for details of the Large Company Scheme).
Assistance from HMRC
HMRC has several specialist units across the UK which are available to assist with R&D claims.
In November 2015 HMRC introduced an R&D Advance Assurance scheme for companies claiming R&D for the first time. Where assurance is given, the company will face no further enquiries into its claims for the first three accounting periods.
Links
See Subscriber version of this note.
Our R&D guides:
Help & Support
Need assistance?
Making a complete and successful R&D claim takes times and requires know-how. Contact the Virtual Tax Partner support service for cost-effective assistance in:
- Starting a claim.
- Planning a claim.
- R&D start-ups.
- Any other queries on R&D.
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