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R&D Tax Credits Explained

R&D Tax Credits Explained

What are R&D tax credits? They are a very niche part of the UK tax code which could bring your company thousands of pounds in tax relief.

What is R&D tax credit?

Introduced by the UK government in 2000, R&D tax credits are a form of tax relief for research and development work undertaken by a business, providing you with a tax reduction or a lump sum payment.

R&D tax credits are highly popular, with over 90,000 companies having claimed back £7.6billion in tax relief in 2022. Research and development tax credits are a niche part of the UK tax code but they could bring your company thousands of pounds in tax relief.

What are the 2024 changes to R&D tax credits?

For accounting periods that begin on or after April 1 2024, the two previous schemes through which R&D tax credits could be claimed, the RDEC and SME schemes, will be merged into one.

The exception is for loss-making SMEs that are R&D intensive – which means more than 30% of their total expenditure is incurred on research and development.

The figure of 30% is a reduction from the previous 40% and SMEs which cross that threshold in terms of their expenditure on research and development will qualify for a new SME intensive scheme.

An R&D tax credit rate of 20%, the same as for the discontinued RDEC scheme, will apply to the merged scheme, while loss-making R&D intensive SMEs will receive a 27% tax credit.

If you want to find out more about how your company will be affected by these changes, call us on 01332 409 711 or email claim@randduk.com

How do R&D tax credits work?

R&D tax credits are a tax incentive administered by HMRC and designed to encourage UK companies to invest in research and development projects. R and D tax credits can enable a company to reduce its tax bill or claim cash credits as a proportion of its R&D expenditure over the qualifying period.

You can make a claim each year. As well as the latest financial year, you can also claim retrospectively for the previous two years. For example, if the end date of your accounting period each year is March 31, you would need to submit your R&D tax credit claim for the accounting period April 1 2021 to March 31 2022 before midnight on March 31 2024.

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Benefits of R&D tax credits

SMEs can have up to 27% of their R&D spending refunded, while larger companies are reimbursed 20% of their R&D expenditure.

Those levels of reimbursement can potentially transform a business by helping to increase productivity, stimulate innovation and have a positive holistic impact.

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What is R&D?

Research and development is an activity undertaken by companies in attempting to develop new products, processes or services or improve those which already exist. This work may carry a degree of risk due to uncertainty over whether the attempt is technologically feasible or achievable in a practical sense. To qualify for R&D tax credit relief, the process does not even need to be successful.

For many companies, R&D is essential to remain competitive and profitable in their industry by way of launching new offerings or refining existing ones. The cost can be expensive, but the government introduced R&D tax credit relief in 2000 to encourage innovation investment and, ultimately, generate national economic growth.

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What are the R&D tax credits schemes available?

The following schemes apply for accounting periods that began before April 1 2024:

RDEC scheme

This is for large companies, defined as having more than 500 staff and generating turnover of more than 100million euros or which have a balance sheet total of over 86 million euros.

If an SME has been subcontracted to conduct research and development work, it will need to claim tax relief through the RDEC scheme.

SME scheme

This is for companies which have less than 500 employees and a turnover of under 100 million euros or a balance sheet total under 86 million euros.

Linked and partner enterprises will be included in this total and can affect a company’s SME status. An R&D-intensive SME – which incurs at least 40% of its total expenditure on R&D – can claim a higher rate of relief.

The following schemes apply for accounting periods that began on or after April 1 2024:

Merged scheme

This is an amalgamation of the two above schemes and has an R&D tax credit rate of 20%, the same as for the discontinued RDEC scheme.

It was introduced to simplify and improve the system, helping to drive innovation in the UK, by adopting a single set of qualifying rules for most R&D businesses.

SME intensive scheme

This applies to loss-making SMEs for which 30% or more of their total expenditure is on qualifying R&D activities, and has an R&D tax credit rate of 27%.

To be eligible for this scheme, a company must have fewer than 500 staff and either a turnover of under 100 million euros or under 86 million euros gross assets.

What qualifies under R&D tax credits?

The eligible R&D activities are:

  • Overcoming technical challenges
  • Creating and testing prototypes
  • Streamlining processes
  • Trialling new (or substituting) materials
  • Developing bespoke software
  • Trial and error
  • Industry firsts
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What costs can I claim under R&D tax credits?

A proportion of the following costs qualify for R&D tax credits in relation to staff working directly on the R&D project:

  • Wages/salaries
  • Class 1 National Insurance contributions
  • Pension fund contributions
  • Payments to administrative or support staff (e.g. specialist cleaning staff) who work to directly support a project
  • Payments made to subcontractors and external workers
  • Payments made to clinical trial volunteers
  • The cost of materials consumed
  • Light, heat and power costs
  • Data licensing and cloud computing costs
  • Software licence fees
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Who is eligible for R&D tax credits?

Claims for R and D tax credits can be made by UK businesses that fit the following description:

  • UK limited companies that are still trading
  • Companies of all sizes in all sectors
  • Both profitable and loss-making businesses

Companies in a broad range of industries can qualify for R&D tax credits, depending on the nature of the research and development work they carry out. While manufacturing, engineering, IT/software and the professional, scientific and technical sectors produce the highest number of submissions, we also have specialists in making claims for companies that operate in the fields of cosmetics, farming/agriculture and food and drink.

Your business needs to have a set of financial accounts, a qualifying R&D spend and be subject to Corporation Tax.

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How much is an R&D tax credits claim worth?

It depends on the size of your business, your R&D spend and whether or not you are making a profit.

A claim can result in a Corporation Tax reduction for profit-making SMEs, a cash credit for loss-making SMEs or a payable tax credit for large companies under the RDEC scheme (the latter applicable to accounting periods that began before April 1 2024).

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What are the R&D tax credit rates?

For accounting periods that began before April 1 2023

Loss-making SMEs benefit to the tune of 33.35% and profit-making SMEs receive a 24.7% benefit. A large company claiming through the RDEC scheme could expect to claim back 13%.

For accounting periods that began between April 1 2023 and March 31 2024

A loss-making SME which spent more than 40% of overall costs on R&D, and is therefore classed as R&D intensive, will benefit to the tune of 27% – £27 for every £100 spent on research and development. A non-R&D intensive loss-making SME will receive an 18.6% benefit, and a profit-making SME’s benefit will be up to 21.5% depending upon its profitability. A large organisation claiming through the RDEC scheme can expect to claim back 20%.

For accounting periods beginning on or after April 1 2024

An R&D intensive SME is now classed as one which incurs more than 30%, rather than the previous 40%, of its total expenditure on R&D. Loss-making R&D intensive SMEs will still qualify for a tax relief rate of 27%, whereas all other companies, regardless of size or profitability, will come under the Merged scheme which has a rate of 20%.

How to calculate R&D tax credits

What you will need for an initial calculation is a clear idea of the specific costs of your company’s R&D activity, regarding the personnel involved and materials used. You can use our R&D tax credits calculator to find out how much you could potentially claim. Don’t worry if you have to input estimated values into the calculator – we will establish the exact figures should you instruct us to handle your claim.

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What to do before you claim R&D tax credits

As each research and development tax credits claim comprises a retrospective look at the work carried out, you will need to be aware that providing a detailed recollection of the R&D projects your business has completed is required.

You will need clear records that can be accessed which break down specific costs. These costs include payroll for any permanent staff included in the R&D and subcontractor invoices, specifically from the dates in question, retrospective across a maximum of the last two accounting periods.

Also important is a concise idea of any wasted materials encountered or prototypes you spent money on, as well as access to utility bill records.

Once you have sufficient information to hand that will give us a good indication of whether you have a viable claim, feel free to contact us for an initial discussion.

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How to claim R&D tax credits

Be assured that making an R&D tax credits claim is not something you need to do alone – at randd, we are available to take on the burden for you.

If you believe your company fits the criteria, joining forces with an R&D tax credits expert like randd can ensure the process evolves as smoothly as possible.

We will explain the scheme and tell you what we need to know, for example dates of the initial trial-and-error, when the first uncertainty happened, what that comprised and who was involved in the project.

In contrast to the vast majority of accountancy practices, at randd we have the resources to dedicate a specialist team to handling your R&D tax relief claim, putting in the countless hours of research required to ensure no stone is left unturned in building a case that will guarantee you receive the maximum value possible.

With expertise accrued over more than 15 years in this industry, we are ideally placed to identify and include every eligible R&D activity – and we have successfully claimed back millions of pounds through our simplified, efficient procedure.

We have a proven track record of claiming back up to NINE times more R&D tax relief than an accountant, alternative agent or a self-submission claim would.

Expert advice on R&D tax credits

It is highly important for randd to manage our clients’ expectations and ensure our processes are undertaken flawlessly to avoid any unexpected obstacles along the way.

When you first contact us, what we will not do is state during your initial call with our team that you definitely have a qualifying claim because there are various restrictions we must work with.

For example, there may be certain elements you think are eligible to be included in a claim when they cannot be. The areas of R&D expenditure need to be clearly managed and described.

We will also ask a lot of questions to make sure each claim is completely valid. If we have any concerns around that, your R&D tax credits claim will not be put forward – so at randd we are careful never to tell anyone at the outset of the process they have a valid claim until we have made the required progress.

Firstly, you will have a pre-qualifying call with a member of our team who, if they deem the activity qualifies, will issue a contract. When the contract has been signed and returned, one of randd’s experienced R&D tax credits managers will contact you and book you in for an initial consultation within the first one-to-two week period depending on availability.

Once the claim has been qualified and we have obtained all of your R&D costs, we can calculate the value of your claim and submit it to HMRC.

If you would like to enlist randd’s help with making an R&D tax credits claim, call 01332 409 711 or email claim@randduk.com

Frequently Asked Questions (FAQs)

Research and Development Tax Credits are a tax incentive designed to encourage UK companies to invest in research and development (R&D). The tax credits can allow a company to reduce its tax bill or claim cash credits as a proportion of its R&D expenditure over the qualifying period.

Yes. The system is designed to reward research and development activity by providing either relief on Corporation Tax or cash credits even if the business is loss-making.

Due to the wide-reaching nature of research and development, 78% of businesses could be eligible for the scheme. If your business is trying to resolve scientific or technological uncertainties with some level of risk, you are carrying out the right type of R&D. It does not matter which sector your business is in.

If you have carried out eligible R&D activities within the past two years then yes, you can qualify for R and D tax credits. The easiest way to check if you qualify is to use our online calculator or get in touch with us.

If you are problem-solving and looking to overcome technological difficulties by creating new products and services or improving existing ones, then you could qualify. Your R&D doesn’t even need to be successful.

No. For accounting periods that began before April 1 2024 there are two incentives to choose from, covering all businesses. The SME scheme is for start-ups and businesses with fewer than 500 staff and turnover under 100 million euros. The second is the RDEC scheme for large companies, defined as having more than 500 staff and generating turnover of more than 100 million euros. From April 2024, those schemes have been merged, with the only exception being for loss-making SMEs – defined in the same way as explained above – who are classed as being R&D intensive and therefore benefit from a higher rate of relief.

This depends on the size of your business and the accounting period for which you are claiming. If you are an SME, you can claim up to 33% (27% for accounting periods that began on or after April 1 2024) of your total R&D costs. If your business is profit-making, this is seen as a Corporation Tax reduction, or if the business is loss-making then this is in payable cash credit and is not taxable. A large company is able to apply for 20% back and this is awarded in the same way as SMEs.

For staff working directly on the R&D project, you can claim a proportion of their:

  • Salaries
  • Wages
  • Class 1 National Insurance contributions
  • Pension fund contributions

You can also claim for administrative or support staff who work to directly support a project (for example, specialist cleaning staff). But you cannot claim for clerical or maintenance work that would have been done anyway, such as managing payroll.

You can claim against 65% of the relevant payments made to an external agency if they provide staff for the project.

Yes. Depending on whether you are claiming under the SME or RDEC scheme, you may claim for costs incurred through subcontracted work. There are certain conditions, but we can figure out all of that for you!

The company can claim for all consumable items used throughout the R&D process, including:

  • materials
  • utilities

The company cannot claim for:

  • the production and distribution of goods and services
  • capital expenditure
  • the cost of land
  • the cost of patents and trademarks
  • rent or rates

You can claim up to 2 years after the end of the accounting period the R&D expenditure relates to.

Essentially, with randd the process is likely to evolve over a period of around 12 weeks. When you first contact us, you will have a pre-qualifying call with a member of our team who, if they deem the activity qualifies, will issue a contract. When the contract has been signed and returned, one of our experienced R&D tax credits managers will contact you and book you in for an initial consultation within the first one-to-two week period depending on availability.

When the claim has been qualified and we have obtained all of your R&D costs, we can calculate the value of your claim and submit it to HMRC. Once submitted, you will typically hear back from HMRC within eight to 12 weeks. Therefore, we advise working to a 12-week/three-month turnaround period.

The success of the R&D project is not a strict requirement. Instead, it is the process that matters, in the sense that the project must have been aimed at advancing or appreciably improving overall knowledge or capability in a scientific or technological field, and not only for your company’s benefit alone; or, to address scientific or technological uncertainties.