How to claim R&D Tax Credits
ABGI makes the process simple, providing a complete end-to-end service in claiming R&D tax credits on your behalf.
About R&D Tax Credits
R&D Tax Credits are a tax incentive from the UK Government designed to encourage companies to invest in R&D. The scheme has been around since 2000 and last year over 59,000 UK companies claimed almost £5.3bn in tax relief. Only Limited Companies qualify - the scheme is not available to sole traders or partnerships. R&D tax relief can be used to reduce your tax bill or paid in the form of cash credits for loss-making companies.
Tax benefits of R&D claims
The effect of an R&D claim is to reduce taxable profits / increase taxable losses. The claim can: reduce profits, reduce profits and create a loss, or increase pre-existing losses. There are three main types of tax benefit that arise from a claim for R&D tax relief, namely:
Payable cash credit
For loss-making SMEs, the payable cash credit is not treated as taxable income. For loss-making Large Companies, the payable cash credit ( see RDEC section) is treated as taxable income.
Rebate of corporation tax
Companies that paid tax in the previous two years can roll back the relief to get a rebate of Corporation Tax. (This is tax they would not have paid if they had made the claim at the time.)
Enhanced deduction
That can be carried forward. Some companies will have no option but to keep the relief for use in future years and others will choose to do so because they are confident that they will be paying tax at a higher rate in the future.
SMEs and large companies
An SME is a company with fewer than 500 FTE staff that satisfies at least one of the following conditions: revenue less than €100m / balance sheet assets less then €86m. Only SMEs can access the SME scheme. Under the SME scheme the rate of relief can be as high as 230%. Lossmaking SMEs have the option to surrender some of their losses for a payable cash credit from HMRC. A Large Company is generally one with 500 or more FTE staff, or one with under 500 staff but revenue greater than €100m and balance sheet assets greater than €86m. SMEs may need to claim under the RDEC scheme, under certain conditions.
The RDEC Scheme
The Research and Development Expenditure Credit (RDEC) scheme has been introduced for any R&D expenditure being claimed under the large company scheme as of 1st April 2013. It allows large companies, and SMEs forced to claim under RDEC, to obtain a payable cash sum, if they are loss-making or an offset of tax payable if they are profitable. It replaced the Large Company Scheme with effect from 1st April 2016. The value of the ATL tax credit is 13% of qualifying R&D expenditure. However, as this is “above the line” the credit is subject to corporation tax.
What kind of activity qualifies?
What constitutes R&D for most people may be very different from HMRC’s interpretation, leading to at best, wasted time and at worst, an HMRC investigation.
Qualifying R&D activity can
- Be undertaken in almost any industry
- Include trying to make something cheaper, faster, smaller, larger or longer, etc
It can even include duplicating a product, process, service or device, as long as it’s in an appreciably improved way.
According to HMRC, a company is undertaking R&D when they're
- Overcoming technological uncertainties aimed at...
- Achieving an advance in technology...
- Which isn't readily deducible by a competent professional
Encouragingly, R&D is still deemed to have taken place whether or not the project is actually successful: it’s the “seeking” that counts.
See how much you could qualify for with our R&D tax calculator tool.
- Improvements to manufacturing processes or machinery (doing things faster, at a better quality, with reduced waste or improved safety)
- Ergonomics – ease of operation or suitability of manufactured products.
- Computer models – for example, to evaluate stresses or fluid flow.
- Using new, unproven methods of manufacturing existing products.
- Developing ways of manufacturing new products.
- Increasing process efficiency / safety
- Reducing emissions
- Incorporating new or untested technology into products, where experimentation is required to select the best implementation route.
- Testing new technology or programming languages, where there’s little information on their usage in the public domain.
- Making existing products work on new platforms, where this involves overcoming technical problems that haven’t been solved before.
- Genetic analysis of agriculturally important organisms or phenotypes.
- Development of protocols for the identification of disease agents.
- Development of new biomarkers (ie molecules that can act as a flag for disease)
- Making improvements to the specificity or accuracy of test protocols.
- Improvements to manufacturing processes or machinery (doing things faster, at a better quality, with reduced waste or improved safety)
- Ergonomics – ease of operation or suitability of manufactured products.
- Computer models – for example to evaluate stresses or fluid flow.
- Using new, unproven methods of manufacturing existing products.
- Developing ways of manufacturing new products.
- Increasing process efficiency / safety
- Reducing emissions
- Incorporating new or untested technology into products, where experimentation is required to select the best implementation route.
- Testing new technology or programming languages, where there’s little information on their usage in the public domain.
- Making existing products work on new platforms, where this involves overcoming technical problems that haven’t been solved before.
- Genetic analysis of agriculturally important organisms or phenotypes.
- Development of protocols for the identification of disease agents.
- Development of new biomarkers (ie molecules that can act as a flag for disease)
- Making improvements to the specificity or accuracy of test protocols.
What costs count for tax relief?
Having established that you have eligible activity, it's then all about what you have spent. Here we look at some of the different types of costs that can be included in and R&D tax relief claim.
SMEs can often claim for subcontractors involved in their R&D projects. However, this can be a complex area. ABGI Innovation Funding Consultants are trained to help our clients to work out which subcontractors they can claim as eligible and which they must exclude.
Companies can claim for items that are used up in the process of R&D, such as chemicals, materials, batteries and certain forms of tooling. These costs can be significant for prototypes* and ‘first in class’ items, and it is important that clients do not claim too much.
Construction of a prototype can be treated as ‘directly contributing’ to seeking an advance in science or technology, but only if it is created solely for use in the R&D. It’s important that the prototypes are actually scrapped. If you end up selling them, they will not be considered part of the R&D project.
If Large Companies fund independent research by charities, education institutions or health service bodies, these payments can be eligible for relief.
Companies often buy software to allow them to conduct, project manage or report upon R&D projects. This software can be claimed as eligible. Note that this is distinct from companies that are developing their own software in projects which may or may not contain eligibility.
These are workers that have been paid through an agency. In practice EPWs are:
- Individuals (not companies)
- Are not employees or directors of the company making the claim for R&D tax relief
- Are obligated through contract to provide services to the company making the claim for R&D tax relief.
- Are paid by the staff provider, not the company making the claim for R&D tax relief.
- Self-employed consultants cannot be EPWs, but may instead be treated as subcontractors if they are contracted to perform a specific task or activity within a company’s R&D project.
Just because a company is subcontracting work doesn’t mean that it is necessarily subcontracting R&D or even the routine work required to support its R&D. It may not have any R&D at all!
Under the SME scheme, 65% of the payments to subcontractors can be claimed except if the SME is connected to its subcontractor (e.g. is its parent, part of the same group, or are under common control). The rules are different for connected subcontractors.
Under the RDEC scheme, payments to subcontractors cannot be claimed except if the Large Company’s subcontractor is a university, college, charity, research organisation or health service body.
There is no requirement that the subcontractor should be in the UK. However, it is important that the subcontractor must be engaged to perform a specific task rather than providing a service.
Direct staff are those involved in core development work as described in the technical report. Indirect staff are those involved in work to support the direct staff, and typically work in Finance, Admin, Maintenance, Personnel and Training.
Payments made to people who volunteer to participate in clinical trials can be eligible.
| SMEs | Large companies | |
|---|---|---|
| Staff (direct and indirect) | ||
| Externally provided workers | ||
| Subcontractors | ||
| Consumables | ||
| Software | ||
| Contributions to independent research | ||
| Clinical trial volunteers |
Am I eligible for R&D tax credits?
If your company invests in research and development, you could be eligible for R&D tax credits. Answer a few quick questions to find out if your research and development expenditure could qualify.
Take the eligibility questionnaire
Tax credits eligibility FAQs
For eligible projects, it is the money spent on salaries, externally provided workers, subcontractors, software, utilities and materials ‘consumed or transformed’, such as chemicals, materials, batteries and certain forms of tooling.
That may well be the case. However, as R&D Tax Specialists, we can often find genuine eligibility where a non-specialist (most Accountants) cannot. Get in touch with us to talk it through.
Yes – we have worked with many Accountants over the years. Contact us to find out how we can work together.
Working together with accountants, we find and maximise the eligibility while accountants utilise its tax benefit. We always complement rather than compete.
Subcontracting can be a tricky situation in an R&D tax credit claim, but it doesn’t necessarily mean you can’t claim. You need to be very sure about your contractual situation, the work you are contracted to do and who is bearing the brunt of the cost, as all these can have an effect on the eligibility of subcontracted work.
Under the SME scheme, 65% of payments to sub-contractors can be claimed except if the SME is connected to the sub-contractor (e.g. is its parent, part of the same group, or are under common control). The rules are different for connected sub-contractors.
No. There is no requirement that the sub-contractor should be in the UK. However, it is important that the sub-contractor is engaged to perform a specific task rather than providing a service.
Yes! The crucial thing is that companies have to be spending money, and the more they have spent on eligible activities, the greater the benefit and some loss-making companies may be eligible to receive a cash credit.
Have a question?
Contact ABGI and a representative will get back to you to discuss your unique needs and explain how we can assist. Submit an enquiry or call us on
0203 984 0321
