The UK R&D Tax Incentive Scheme
What are R&D Tax Incentives?
Research and Development (R&D) Tax Relief Incentives, also known as R&D Tax Credits, were introduced by the British government in 2000 for Small and Medium Enterprises (SMEs) and in 2002 for Large Companies. Their primary goal was to reward companies operating within the UK who were investing in innovation.
In the UKs Industrial Strategy, the UK Government has committed to spending 2.4% of GDP on R&D by 2027, and the R&D Tax Incentives form a valuable part of this. This is due to innovation being one of the most important drivers of economic growth. Companies that consistently invest in R&D activities are predicted to be 13% more productive than those that do not.
Innovation creates jobs, makes companies more competitive and boosts the economy. Companies that tend to make an R&D Incentives claim spend the incentives on either hiring or undertaking more R&D projects.
How do they work?
When a company spends money on innovation, whether it is developing something new or significantly improving an existing product, process, or service, it becomes a potential candidate for an R&D Tax Incentive.
Before you think too much about your potential benefit, it's important to understand if your business can claim R&D Tax Credits at all. Then secondly you need to qualify your relevant projects against the guidelines. You need to be able to showcase to HMRC that your projects can be considered to be innovative rather than just complex.
You can look back up to two financial years following the end of your accounting period. For periods starting after April 2023, new pre-notification rules are in place. This means you might only have 6 months following the end of your accounting period to let HMRC know you want to make a claim, if you haven’t claimed recently.
Can my business claim R&D Tax Credits?
There are some simple and relatively straightforward rules when it comes to identifying a company's eligibility for R&D Tax Credit:
- You must be a limited company, that is a going concern, registered in the UK and be subject to Corporation Tax.
- You must carry out qualifying research and development activities (as discussed below)
- You must have relevant expenditure on staff, subcontractors, other third-parties, consumables and software related to those activities.
- You must be within the time limits as detailed in the section above to make a claim.
What counts as R&D?
The definition of R&D for tax purposes is much broader than you might think.
The guidelines are set out by the Department of Science, Innovation and Technology (DSIT) and broadly the following are the two key points to satisfy. A specific project can qualify if:
1 . A project seeks to achieve an advance in science or technology, such as:
- Developing a completely new product, process or service
- Developing a better product, process or service
- Creating new knowledge in the field of either science or technology
Note that it doesn’t need to succeed, you just need to try to achieve the advance.
2. The project needs to have technological or scientific uncertainty.
- An experienced person within that area of expertise needs to confirm that the solution for the challenges presented in the project was not routine.
- It needs to go beyond just a complex project and be genuinely uncertain.
Am I a large company or not?
Broadly an SME for R&D purposes is defined as a company with fewer than 500 full-time employees, or a turnover of less than €100 million and a balance sheet of less than €86 million. Note that it is a little more complex than that, as if you have any linked (>50%) or partner (>25%) companies in your group, then you might need to add in there costs as well.
In addition, there are times when even if you are an SME, you might have to claim under the large company scheme. The main two reasons this could happen are if:
- Your R&D project costs have been subsidised by someone else, for example by a grant.
- Your R&D project has been undertaken on a large company’s behalf.
Note, under the new merged scheme beginning for periods starting after 1 April 2024, these rules are changing.
What are the R&D Tax Credit Rates?
There are currently two schemes in operation depending on your accounting period.
1. For periods that started before 1 April 2024, the benefits are:
As an SME, you can claim up to 27p for every £1 of qualifying spending if you are a loss-making R&D intensive (where more than 40% of your expenditure is related to R&D) company.
If you are an SME, but not an R&D intensive company, then you can claim:
- Up to 21.5p on the £1 of qualifying expenditure if you are profit making
- Up to 18.6p on the £1 of qualifying expenditure if you are loss making
The exact percentage depends on the company’s financial position
As a large company you can claim up to 15p for every £1 of qualifying spend.
2. For periods that started after 1 April 2024, there is a new merged scheme in place. The benefits are:
As an SME, you can claim up to 27p for every £1 of qualifying spending if you are a loss-making R&D intensive (where more than 30% of your expenditure is related to R&D) company.
If you are not a loss-making R&D intensive company, then all companies (regardless of size), can claim up to 15p for every £1 of qualifying spend.
What is HMRC’s processing and repayment time?
If you are claiming under the SME scheme, HMRC aims to make any payments within 40 days. You should allow another ten days for the money to reach your bank account once the R&D claim is approved.
Large companies, however, might have to wait slightly longer, as HMRC has no specific processing times for large company claims. This is usually due to their Corporation Tax returns being more complex than those of SMEs.
Do HMRC enquire into the claims?
Absolutely. The R&D claim is made as part of your Corporate Tax Self-Assessment return. So you should be aware that HMRC are able to and do select a reasonable proportion of claims for a further compliance check, this is often known as R&D tax enquiry. During this check they will likely request new information and clarify information previously provided.
Following the submission of your R&D claim, HMRC has around 12 months (depending on whether the R&D claim was made as an amendment) in order to enquire into your return.
Should they do so, this will likely be a compliance check raised by their Individual and Small Business Compliance (ISBC) or Wealthy Mid Sized Business Compliance (WMBC) teams via the form of a letter. You will then have 30 working days to respond to the letter and answer their questions.