Your company could be eligible for thousands of pounds in tax relief. Find out everything you need to know about R&D tax credits below:
R&D Tax Credits Explained
What Are R&D Tax Credits?
R&D tax credits are a type of company tax relief, received by companies undergoing research and development work upon submitting a claim to HMRC. R&D tax credits are available to any businesses from small and medium-sized companies (SMEs) to large enterprises.
The UK government introduced tax credit relief for R&D back in 2000. This government incentive has helped reward companies nationwide for investing in innovation and stimulating national economic growth. Since then, thousands of companies working in a wide range of industries and sectors have received over £42 billion in financial assistance.
What Types of Tax Credits Can You Receive?
An R&D tax claim can result in several different types of credits:
- Reductions in the company’s Corporation Tax bill (for profit-making SMEs)
- Cash credit sums of up to 33% of R&D expenditure (for most SMEs)
- Payable tax credit (for large companies under the RDEC scheme, applicable only to accounting periods which started before the 1st of April 2024)
Why are Tax Credits Important?
Since their introduction, R&D tax credits have encouraged businesses all over the UK to invest in R&D, innovating products, processes, and services. In 2022 alone, over 90,000 companies claimed back £7.6 billion in tax relief.
R&D tax credits:
- Provide a huge financial boost to SMEs and large companies, which stimulates in-house productivity, speeds up new developments, and has an overall positive impact on company culture.
- Are much more accessible than other forms of R&D funding, such as corporate debt or VC investment.
- Help push companies ahead of their competitors, helping them grow as a business in the long run.
Is Your Business Eligible for R&D Tax Credits?
Before submitting a tax claim to HMRC, you need to ensure your business fulfils the eligibility criteria, and that your work satisfies HMRC’s definition of innovative R&D.
What is Research & Development?
Research and Development, or R&D, is an activity undertaken by companies when attempting to develop new products, processes, or services, or improve and optimise existing ones. R&D work carries a certain degree of risk since there is no certainty that the attempt is technologically feasible. Please note the success of your project does not influence your eligibility for R&D tax relief claims.
According to Gov.uk, what counts as research and development for tax purposes falls into the following categories:
– R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology.
– The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.
– Certain qualifying indirect activities related to the project are also R&D. Activities other than qualifying indirect activities which do not directly contribute to the resolution of the project’s scientific or technological uncertainty are not R&D.
HMRC’s definition isn’t always so clear-cut. Not sure if your work counts as R&D?
What about Tax Relief for Creative Industries?
The R&D tax credits system does not specifically target businesses operating within the creative industries. However, in 2023 the government announced two new tax relief schemes, the Audio-Visual Expenditure Credit (AVEC) and the Video Games Expenditure Credit (VGEC).
Through these schemes, the government made temporary tax relief available to companies that are directly involved in the production and development of:
- Video games
- Theatrical productions
- Orchestral concerts
- Museum or gallery exhibitions
- Film and television
Read our guide to creative industries tax relief to learn more.
What Activities Qualify for R&D Tax Relief?
The eligible R&D activities are:
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- Creating or developing industry firsts, such as new products or processes, bespoke software, or composite material
- Adapting to industry requirements (e.g. energy efficiency, carbon emission reductions)
- Testing new (or substituting) materials through trial and error
- Overcoming technical challenges
- Streamlining processes
What Are the Qualifying Costs for R&D Tax Credits?
For each R&D project, you’ll need to keep track of the relevant expenses to submit a valid claim. Below, we break down the eligible R&D expenditure:
R&D Tax Credit Schemes
In 2024, the UK government implemented major changes to the R&D tax claim scheme. Depending on the relevant accounting period that your claim applies to, your business might fall into different categories:
R&D Schemes Before the 1st of April 2024
RDEC Scheme
- The RDEC scheme applies to larger companies
- Also applies to SMEs subcontracted to conduct R&D work
SME Scheme
- Applies to profit-making and loss-making SMEs
- Under the SME scheme, R&D-intensive SMEs (which spend 40% or more of their overall expenditure on R&D) are eligible for higher rates of tax relief
R&D Schemes After the 1st of April 2024
Merged Scheme
- Resulted from merging the two previous schemes
Intensive Scheme
- Only applies to SMEs that spend over 30% of their total expenditure on qualifying R&D activities
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 [email protected]
The R&D Tax Credit Process – How Much Can You Claim?
You can make an R&D tax claim each year, as well as a retroactive claim for the previous two years. For example, if the end date of your accounting period is March 31st, you would need to submit your R&D claim for the accounting period of April 1st 2022 – March 31st 2023 before midnight on March 31st 2025.
How Long Does it Take to Receive R&D Tax Credits?
HMRC processes 95% of all R&D claims within 28 days, but it can sometimes take up to 100 days. The wait time depends on the complexity of your business or claim, as well as the season – most companies end their accounting year in December or March, so claims submitted during those busy times will take longer to process.
Your funds typically reach your account within 20 days after your claim is approved.
How Much Can My Company Claim in R&D Tax Credits?
The amount of tax relief you are eligible to claim will depend on the size of your business, your R&D spend, your profit status, as well as the scheme you fall under. Check the values below for a rough estimate:
Need help estimating your research and development tax credit rates? Use our R&D tax credit calculator – all you need to do is input the costs of your R&D activity, and we’ll provide an estimated value.
Risks Involved in Submitting an R&D Claim to HMRC
When submitting an R&D tax claim, an inexperienced person faces the risk of making mistakes, such as adding the wrong numbers or submitting a claim for expenditures that don’t qualify. In such cases, HMRC may launch a compliance check (enquiry).
To understand the implications, let’s imagine the following scenario:
- Tax inspector reviewing your tax credit submission finds mistakes or irregularities in your claim
- Tax inspector will contact you on multiple occasions with a list of questions, to gather more data about your research. You might need to answer in writing or face-to-face, depending on the complexity of the queries. This process can take from several weeks to years, delaying your funding.
- Depending on the result of your enquiry, your R&D funding amount might be reduced, or your claim might be fully rejected. HMRC might also find you guilty of negligence or claiming fake expenses, resulting in a hefty fine.
Minimise Risks With Randd - Your R&D Tax Specialists
Legislation can be complex and ever-evolving, and you will always face some degree of risk when dealing with it by yourself or without expert support.
When choosing Randd as your R&D tax specialist, you access numerous benefits including:
- Minimised risks of enquiries and claim rejection when dealing with tricky legislation
- Fully transparent bespoke consultations – if we have any concerns around a claim, we will not put it forward
- A specialised team specifically dedicated to your project, conducting thorough research to build a strong claim that maximises tax credit value
Up to 9 times more R&D tax relief than you would get through an external accountant, alternative agent or self-submission
The Randd Research and Development Tax Claim Process
With over 15 years in the industry, we have the specialist knowledge to support countless innovative businesses as they push the boundaries of technological development. We have successfully claimed back millions of pounds through our seamless, simplified tax claims process:
1. Eligibility check
Using our tax credits calculator, you can check if your business qualifies for R&D tax credits, as well as receive an estimate of how much you could claim. You’ll then have a prequalifying call with an expert member of our team – once we establish you have qualified, we can issue a contract.
2. Compiling and submitting your HMRC claim
Once you’ve signed the contract, we’ll book you in for an initial consultation within 1-2 weeks. Throughout the process, our dedicated team of tax credit managers will ask for all the details they need and will put in hours of research to craft a solid claim that maximises tax credit.
3. Risk assessment
We perform 3 different stages of risk assessment – at sign-up, at the first technical meeting and again before submission. We minimise any obstacles to ensure a smooth process and a successful claim, keeping you fully in the loop from start to finish.
Ready to receive specialist support for your tax credits?