What are R&D Tax Credits
R&D Tax Credits are a UK tax incentive designed to encourage companies to invest in innovative projects in research and development.
Companies can reduce their tax bill or claim payable tax rebate as a proportion of their R&D expenditure.
Credits can be claimed by a range of companies that seek to research or develop an advance in their field. It can even be claimed on unsuccessful projects.
Your company may be able to claim Corporation Tax relief if your project meets the HMRC definition of R&D.
How can R&D tax credits benefit your business?
Companies that spend money developing new products, processes or services; or enhancing existing ones, are eligible for R&D tax relief. If you’re spending money on your innovation, you can make an R&D tax credit claim to receive either a cash payment and/or Corporation Tax reduction. The scope for identifying R&D is huge – in fact, it exists in every single sector. And if you’re making a claim for the first time, you can typically claim R&D tax relief for your last two completed accounting periods.
Does my business qualify?
Claims can be made under two initiatives: the SME initiative for smaller businesses, and the RDEC initiative for larger organisations. Under both initiatives, to benefit from R&D tax incentives, you must:
- Be a limited company in the UK that is subject to Corporation Tax.
- Have carried out qualifying research and development activities.
- Have spent money on these projects.
What counts as R&D?
The HMRC R&D criteria are purposefully broad. Whatever 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.
The work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology.
The project must relate to a company’s core trade - either an existing one, or one that you intend to start up based on the results of the R&D.
To get R&D relief your company needs to explain how a project:
- looked for an advance in science and technology
- had to overcome uncertainty
- tried to overcome this uncertainty
- couldn’t be easily worked out by a professional in the field
Within the government’s accepted research and development definition, R&D doesn’t have to have been successful to qualify. You can also include work undertaken for a client, as well as your own projects.
What costs qualify for R&D tax credits?
When putting together an R&D tax credit claim, we look for the following types of R&D qualifying expenditure:
- Staff, including salaries, employer’s NIC, pension contributions and reimbursed expenses.
- Subcontractors and freelancers.
- Materials and consumables including heat, light and power that are used up or transformed by the R&D process.
- Some types of software.
- Payments to the subjects of clinical trials.
What might an R&D tax credit be worth
SMEs are able to claim up to 27p for every £1 spent on qualifying R&D activities. The average claim made by SMEs in the UK is £53,663 (2022-23).
Large companies are able to claim up to 16.2p for every £1 spent on qualifying R&D activities. The average claim made by large companies in the UK is £225,298 (2022-23).
The R&D tax credit rates applicable from 1 April 2023 are shown in the table below.
Who are you?
Rates by incentive:
SME R&D tax credit scheme
Research and Development Expenditure Credit (RDEC)
A loss-making SME
Up to 27%
Up to 16.2%
A profit-making SME
Up to 21.5%
Up to 16.2%
Up to 16.2%