R&D Relief is a Corporation Tax relief that may reduce your company or organisation’s tax bill.
Alternatively, if your company or organisation is small or medium-sized, you may be able to choose to receive a tax credit instead, by way of a cash sum paid by HM Revenue & Customs.
But your company or organisation can only claim R&D Relief if it’s liable for Corporation Tax.
This guide explains who can apply for R&D Relief and what conditions an R&D project must meet to qualify. It also explains what costs you can claim for, how you claim, and whether you can get tax relief, or tax credits paid back to you.
Table of Contents
R&D Relief schemes
Your company or organisation can only claim R&D Relief, if it’s liable for Corporation Tax.
There are two schemes for claiming relief, depending on the size of the company or organisation:
- the Small or Medium-sized Enterprise (SME) Scheme
- the Large Company Scheme
What is an SME for R&D?
An SME is a company or organisation with fewer than 500 employees and either of the following:
- an annual turnover not exceeding €100 million
- a balance sheet not exceeding €86 million
This definition applies to spending on R&D from 1 August 2008. Before that date, an SME was a company with fewer than 250 employees, and either of the following:
- an annual turnover not exceeding €50 million
- a balance sheet not exceeding €43 million
Your company or organisation may not be considered to be an SME if it’s part of a larger enterprise that – taken as a whole – would fail these tests.
When you’re considering the limits shown above, you may need to include any company that has a shareholding of 25 per cent in your company and/or any company that your company holds a 25 per cent share in.
If your company or organisation is claiming relief under the SME Scheme, for accounting periods ending before 9 December 2009, then it must own any intellectual property that might arise from the project.
This definition of an SME for R&D Relief purposes is not necessarily the same as that used by HMRC in relation to other areas of Corporation Tax or other tax areas such as PAYE (Pay As You Earn), or by other government agencies.
Read details of the definition of an SME for R&D Relief on the HMRC website- Opens in a new window
Subcontractors
You cannot claim R&D Relief under the SME Scheme if you are a subcontractor – that is, if you have been subcontracted to do the work on behalf of somebody else. But, even if your company is small or medium-sized, you may still be able to claim, as a subcontractor, under the Large Company Scheme.
Find HMRC guidance on when subcontractors may be able to claim R&D Relief
The Small and Medium-sized Enterprise Scheme
This scheme has higher rates of relief. From 1 April 2011, the tax relief on allowable R&D costs is 200 per cent – that is, for each £100 of qualifying costs, your company or organisation could have the income on which Corporation Tax is paid reduced by an additional £100 on top of the £100 spent. It also includes a payable credit in some circumstances.
Subject to Parliamentary approval, the rate will increase further to 225 per cent from 1 April 2012.
You can only claim under the scheme for Small or Medium-sized Enterprise (SMEs) if your company or organisation meets the definition of an SME for R&D Relief purposes. For guidance, see the page in this guide on R&D Relief schemes.
In certain specific situations, even if your company or organisation meets the definition of an SME, you may not be able to claim relief under the SME Scheme. But, you may be able to claim under the Large Company Scheme. This means that, if your company is small or medium-sized, you may be able to claim R&D Relief under the SME Scheme for one project and the Large Company Scheme for another.
If your company is small or medium-sized, you can only get paid tax credit if your company is a going concern. This means its latest published accounts were prepared on a going concern basis, and nothing in the accounts suggests that its status – as a going concern – depends on it receiving R&D Relief or tax credits.
If your company or organisation ceases to be a going concern after making a claim but before any credit is paid, HM Revenue & Customs (HMRC) treats the claim as if it has not been made and you cannot get tax credit.
Find the rates of R&D Relief before 1 April 2011 on the HMRC website
The Large Company Scheme
If your company is not small or medium-sized, then you can only claim under the Large Company Scheme.
See the page in this guide on R&D Relief schemes to find out whether your company or organisation meets the definition of a Small or Medium-sized Enterprise (SME).
Amount of expenditure
Tax relief is only available if you spend at a rate of at least £10,000 a year on qualifying R&D costs in an accounting period. The Chancellor announced in his Budget on 31 March 2011 that this limit will be removed for expenditure incurred on or after 1 April 2012. There’s no upper limit.
Rate of tax relief
From 1 April 2008, the tax relief on allowable R&D costs is 130 per cent – that is, for each £100 of qualifying costs, your company or organisation could have the income on which Corporation Tax is paid reduced by an additional £30 on top of the £100 spent. If instead there is an allowable trading loss for the period, this can be increased by 30 per cent of the qualifying R&D costs – £30 for each £100 spent. This loss can be carried forwards or back in the normal way.
Find the rates of R&D Relief before 1 April 2008 on the HM Revenue & Customs (HMRC) website
Which R&D projects might qualify for Relief?
Your company or organisation can only claim for R&D Relief if an R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability.
Furthermore, for accounting periods ending before 9 December 2009, the project must satisfy both of the following conditions:
- it must be related to your company or organisation’s trade – either an existing one, or one that you intend to start up based on the results of the R&D
- if your company or organisation is claiming relief under the Small or Medium-sized Enterprise Scheme, it must own any intellectual property that might arise from the project
For accounting periods ending on or after 9 December 2009, only the first condition applies because the second condition has now been abolished and won’t apply to relevant expenditure for accounting periods ending on or after that date.
Read HMRC guidance on owning intellectual property for R&D Relief purposes- Opens in a new window
How to show the project is R&D within the tax definition
There are guidelines that define all the following terms, and it’s important to understand these concepts before attempting to reach a view on whether your company or organisation has an R&D project for tax purposes.
The terms are as follows:
- project
- advance in science or technology
- science
- technology
- directly contribute
- scientific or technological uncertainty
Find definitions of key R&D Relief terms on the HMRC website- Opens in a new window
It’s helpful to present the following questions – with your own answers – when filing your Company Tax Return, so HMRC can see your view of how the definition of R&D applies to your project or projects.
What is the scientific or technological advance?
Rather than stating the name of the product, process, functionality, etc, being developed you should consider what scientific or technological advance is being sought. This focuses attention on the project’s aim for an advance, which is the key issue in judging whether R&D for tax purposes is being undertaken.
Science does not include work in the arts, humanities and social sciences – including economics.
It’s not enough that a product is commercially innovative. You cannot claim in respect of projects to develop innovative business products or services that don’t incorporate any advance in science or technology.
What were the scientific or technological uncertainties involved in the project?
Scientific or technological uncertainty exists when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional working in the field.
But uncertainties that can be resolved through relatively brief discussions with peers are routine uncertainties rather than technological uncertainties. Technical problems that have been overcome in previous projects on similar systems are not likely to be technological uncertainties.
You should set out at a high level, in a form understandable to the non-expert, what these uncertainties were and when they started and ended.
How and when were the uncertainties actually overcome?
Describe the methods adopted to overcome the uncertainties and the investigations and analysis undertaken. This should not be in great detail, simply sufficient to show that the matter was not straightforward. Describe the successes and failures and the impact of these on the overall project. If the uncertainties were not overcome, explain what happened.
Why was the knowledge being sought not readily deducible by a competent professional?
It might be publicly known that others have attempted to resolve the uncertainties and failed, or perhaps that others have resolved the uncertainties but that precisely how it was done is not in the public domain. In either case, a valid technological uncertainty can still exist.
Alternatively, if the project is one where there is little public information available, you’ll need to show that the persons leading the R&D project are themselves competent professionals working in the relevant field. This might be done by outlining their relevant background, professional qualifications and recent experience. Then have them explain why they consider the uncertainties are scientific or technological uncertainties rather than routine uncertainties.
Whichever is appropriate set out the details and have evidence available if needed.
Which costs qualify for R&D Relief?
To qualify as R&D, any activity must meet the definitions set out by the Department for Business, Innovation & Skills (BIS). These guidelines state that the activity must contribute directly to seeking the advance in science or technology or must be a qualifying indirect activity.
If your company and the project both meet the necessary conditions, then you can claim tax relief on revenue expenditure (generally, this means costs incurred in the day-to-day running of the business – not capital expenditure on assets) in the areas outlined below, if all necessary conditions are met.
If you have spent money on something such as staff costs where the employee was only partly engaged on R&D activities, you can only claim for an appropriate proportion of the cost.
Follow the links below to find detailed HM Revenue & Customs (HMRC) guidance.
Read HMRC definitions of R&D for relief purposes- Opens in a new window
Read current HMRC guidance on the qualifying conditions of an R&D project- Opens in a new window
Read HMRC guidance on apportioning mixed expenditure costs- Opens in a new window
Employee costs – that is, employing staff directly who are actively engaged in carrying out R&D itself. The staff must be employed under a contract of employment directly with your company or organisation – not consultants, agency workers, or staff/directors whose contracts of employment are with other companies. However, these others may qualify under either the rules for staff providers or subcontractors.
Find HMRC guidance on which employee costs qualify for R&D Relief- Opens in a new window
Staff providers – paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D. The staff provider needs to contract with the individual whose services they supply – not through another person.
Materials – consumable or transformable materials used directly in carrying out R&D. These are actual physical materials that are consumed in the R&D, and not things like telecommunication or data costs.
Find HMRC guidance on which materials costs qualify for R&D Relief- Opens in a new window
Payments to clinical trials volunteers – the cost of relevant payments to subjects of clinical trials.
Read HMRC information about which clinical trial costs qualify for R&D Relief- Opens in a new window
Utilities – power, water, fuel used directly in carrying out R&D, but not things such as telecommunication costs and data costs.
Software – computer software used directly in the R&D.
Read HMRC guidance on which computer software costs qualify for R&D Relief- Opens in a new window
Subcontracted R&D expenditure – if your company or organisation is claiming relief under the Small or Medium-sized Enterprise (SME) Scheme, then you may be able to claim back 65 per cent of what you spend on certain R&D activities carried out for you by a subcontractor. But if the subcontractor is connected to your company or organisation, or you have jointly elected for connected parties treatment, special rules apply. If your company or organisation is not a SME, you can only claim expenditure on activities that are undertaken directly on its behalf by certain specific kinds of subcontractor.
Read HMRC guidance on subcontracted R&D activities qualify for R&D Relief- Opens in a new window
Find HMRC guidance on R&D Relief where the subcontractor is a connected party- Opens in a new window
Capital expenditure
Although R&D Relief is only available for ‘revenue expenditure’ (generally, day-to-day running costs, as opposed to capital expenditure), if you are involved in R&D and you spend money on capital assets, you may be able to claim R&D capital allowances.
See the page in this guide on capital allowances and R&D Relief.
Read about the distinction between revenue and capital expenditure on the HMRC website
How much R&D Relief SMEs can claim
Amount of expenditure
Tax relief is only available if your company or organisation spends at a rate of at least £10,000 a year on qualifying R&D costs in an accounting period. The Chancellor announced in his Budget on 31 March 2011 that this limit will be removed for expenditure incurred on or after 1 April 2012. There’s an upper limit of €7.5 million on the total amount of aid you can receive on any one R&D project.
Rate of tax relief or credit
The tax relief on allowable R&D costs incurred after 1 April 2011 is 200 per cent – that is, for each £100 of qualifying costs, your company or organisation could have its Corporation Tax bill reduced by an additional £100 on top of the £100 spent.
If instead there is an allowable trading loss for the period, this can be increased by 100 per cent of the qualifying R&D costs – so that’s £100 for each £100 spent. This loss can be carried forward in the normal way, but only if you choose not to convert it to tax credits.
Example – R&D Relief for expenditure of £20,000 where the company has made a profit of £20,000
| Calculation step | Amount |
|---|---|
| R&D expenditure | £20,000 |
| R&D relief | £20,000 x 100% = £20,000 |
| Normal taxable profit | £20,000 |
| Taxable profit less R&D relief | £20,000 – £20,000 = 0 |
| Revised taxable prodit | 0 |
Example – R&D Relief for expenditure of £20,000 where the company has made a loss of £10,000
| Calculation step | Amount |
|---|---|
| R&D expenditure | £20,000 |
| R&D enhancement | £20,000 x 100% = £20,000 |
| Normal trading loss | £10,000 |
| Trading loss less enhanced by R&D Relief | £10,000 – £20,000 = £30,000 |
| Loss available to carry forward or back for Corporation Tax purposes | £30,000 |
If your company makes a loss, you can choose to receive your tax relief by way of tax credits – a cash sum paid to you by HMRC – if your company or organisation has PAYE (Pay As You Earn) and National Insurance contributions (NICs) liabilities for that period. The amount of tax credit you can receive is limited to the total of PAYE and NIC liabilities for that period. But it includes liabilities for all directly employed staff – not simply those working on the R&D project. The Chancellor announced in his Budget on 31 March 2011 that this limit will be removed for expenditure incurred on or after 1 April 2012.
Download the Budget announcement on planned R&D changes from the HMRC website (PDF, 330K)
Example – Converting R&D Relief on expenditure of £20,000 to a tax credit payment
| Calculation step | Amount |
|---|---|
| R&D expenditure | £20,000 |
| R&D enhancement | £20,000 x 100% = £20,000 |
| Normal taxable profit | £5,000 |
| Trading loss (after R&D relief) | £15,000 |
| R&D expenditure qualifying for conversion to credits | £15,000 |
| Potential tax credit | £15,000 x 12.5% = £1,875 |
| PAYE and NICs liabilities (say) | £5,000 |
| Payable tax credit | £1,875 |
| Losses available to carry forward or back | Nil |
The rates for tax relief and tax credits were different before 1 April 2011.
Subsidies and grants
If your company or organisation has received a subsidy or grant for an R&D project, this may affect how much tax relief you can claim. If the subsidy or grant is a ‘State Aid’ recognised by the European Commission, then you cannot claim anything under the Small or Medium-sized Enterprise (SME) Scheme. For any other type of subsidy or grant, the R&D expenditure you can claim for is reduced by the amount of subsidy or grant received.
You may be able to claim under the Large Company Scheme instead. But you can only do this if both of these are true:
- the expenditure would have been allowable under the Large Company Scheme if your company or organisation was ‘large’
- the expenditure is ruled out of the SME Scheme only because it was subsidised or because the amount received exceeds the €7.5 million limit
If you do claim under the Large Company Scheme, then the large company rules apply. The rate of tax relief is lower, and you cannot convert the relief into payable tax credits.
Find out whether a subsidy will affect a claim for R&D Relief on the HMRC website.
How and when to claim R&D Relief
Before claiming R&D Relief, you should read the rest of this guide, and the detailed technical material referred to, to ensure that your company or organisation meets the necessary conditions and that in your view, the project and expenditure qualify for relief.
HM Revenue & Customs (HMRC) can ask questions about your claim if they decide to check it.
HMRC compliance checks and enquiries for Corporation Tax
When to claim
You must make any claim for R&D Relief in your Company Tax Return or amended return. The normal time limit for making your claim is two years after the end of the relevant Corporation Tax accounting period.
How to claim
You claim for R&D Relief by putting an X in either Box 99 (Small or Medium-sized Enterprise (SME)) or Box 100 (Large Companies) of your Company Tax Return, and in both cases, put the enhanced expenditure in Box 101 – that is, the actual amount spent multiplied by 200 per cent or 130 per cent as appropriate. You should also include this enhanced figure in your calculations of the profit (Box 3) or loss (Box 122) for the period.
If your company or organisation is an SME and you want to convert some or all of the tax relief into payable tax credits, you will also need to put the amount payable to you in Box 87, Box 89 and Box 143 – and put an X in the ‘repayment due for this return period’ Box on page 1.
Although it’s not a legal requirement, HMRC encourages companies and organisations to:
- tell them why the company or organisation considers its project(s) to be allowable as R&D – see the page in this guide on how much R&D Relief SMEs can claim
- provide a summary of the costs incurred on the R&D and how the figures in the return were arrived at
Completing and filing your Company Tax Return
How you’ll get your R&D Relief or tax credit
If you’re just claiming relief, this will reduce your company or organisation’s profit chargeable to Corporation Tax for the relevant accounting period. There’s nothing further for you to do. But if you have chosen to give up your enhanced relief to receive tax credits instead – or if you have submitted a claim to carry back a loss to be set off against profits of a previous accounting period – then HMRC will make the payment after they receive your return.
If you have claimed a payment and HMRC opens a compliance check or ‘enquiry’ into your return, they may agree to make interim payments. When the enquiry is concluded, they’ll pay the balance.
Capital allowances and R&D Relief
R&D Relief only applies to revenue expenditure – generally, costs incurred in the day-to-day running of the business, as opposed to money spent on capital assets. So you cannot claim this relief on anything you spend on capital assets. But you may be able to claim relief for capital expenditure on R&D as a capital allowance known as ‘Research and Development Allowance’.
But, if any R&D revenue expenditure is ‘capitalised’ in your company’s accounts, this may still qualify for R&D Relief.
Read about R&D Relief for capitalised expenditure on the HMRC website
Record keeping for R&D Relief
There is no specific record keeping requirement for R&D Relief claims. But the general Corporation Tax requirement to keep sufficient records to support the entries on your Company Tax Return still applies.
HM Revenue & Customs (HMRC) doesn’t expect you to create new primary business records just for an R&D Relief claim. But you may need to maintain your business records in a different way, to allow you to access the information you need easily.
Before you make your claim, you may want to involve your R&D staff in the process. This will help you identify qualifying activities and expenditure.
HMRC may ask to see your company or organisation’s records when they make a compliance check into your Company Tax Return or R&D Relief claim made separately from a return.
Records for Corporation Tax: what you need to keep
Read about record keeping for R&D claims on the HMRC website- Opens in a new window
HMRC compliance checks and enquiries for Corporation Tax
Answers to your R&D Relief questions
There are specialist HM Revenue & Customs (HMRC) units located throughout the UK who are able to assist you with your claim. These units are organised on a geographical basis, dealing with claims from companies and organisations whose main R&D base is within their postcode allocation.
If you have any questions about R&D Relief, the appropriate specialist unit will be happy to help you. You can contact them before making a R&D Relief claim, or while you are putting together your claim.
But if your company’s tax affairs are handled by the HMRC Large Business Service (LBS), you should contact your LBS Office direct
Find your HMRC specialist R&D Relief unit- Opens in a new window
R&D Consultative Committee
The R&D Consultative Committee monitors developments in the operation of the R&D tax relief schemes, and acts as a forum for discussion and consultation. The committee is chaired by HM Revenue & Customs (HMRC) and consists of representatives from HMRC, business, and professional bodies.
Read more about the R&D Consultative Committee on the HMRC website
Voluntary advance assurance pilot
HM Revenue & Customs (HMRC) has set up a ‘Voluntary advance assurance’ pilot to help small companies – including start-ups – to make their first R&D Relief claim.
Recruitment for the pilot has closed due to a high demand for the limited places. However, the specialist R&D Relief units continue to offer support and assistance, and will be happy to answer any questions about R&D Relief claims.
Find contact details for your specialist R&D Relief unit on the HMRC website- Opens in a new window
Results of the pilot will be made available in due course.
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