Research and Development (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 (HMRC)
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.
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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:
‘Above the Line’ R&D expenditure credit
The Large Company Scheme includes an ‘above the line’ credit which has been introduced for expenditure incurred on or after 1 April 2013. It will initially be optional, running alongside the enhanced-deduction scheme which it will replace in April 2016..
Amount of expenditure
Relief is given as a taxable credit on the amount of qualifying R&D expenditure. The rules for identifying qualifying R&D activity and calculating R&D expenditure remain unchanged.
Rate of Relief
From 1 April 2013 relief is given at 10 per cent of qualifying R&D expenditure.
A SME is a company or organisation with fewer than 500 employees and either of the following:
This definition applies to spending on R&D from 1 August 2008. Before that date, a SME was a company with fewer than 250 employees, and either of the following:
Your company or organisation may not be considered to be a 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 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 a 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, or by other government agencies.
You can't 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.
This scheme has higher rates of relief. From 1 April 2012, the tax relief on allowable R&D costs is 225 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 £125 on top of the £100 spent. It also includes a payable credit in some circumstances.
You can only claim under the scheme for SMEs if your company or organisation meets the definition of a SME for R&D Relief purposes (see the section above for a definition).
In certain specific situations, even if your company or organisation meets the definition of a 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, then you can only claim R&D relief if your company is a going concern when it makes the claim and is not in administration or liquidation at that time. If your company or organisation ceases to be a going concern after making a claim but before any credit is paid, HMRC treats the claim as if it has not been made and you can't get tax credit.
If your company is not small or medium-sized, then you can only claim under the Large Company Scheme.
See the section in this guide on R&D Relief schemes to find out whether your company or organisation meets the definition of a SME.
Tax relief was only available if you spent at a rate of at least £10,000 a year on qualifying R&D costs in an accounting period but this limit is removed for accounting periods ending on or after 1 April 2012
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.
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. See below for how to find out what this means and how to show a project meets these terms.
Furthermore, for accounting periods ending before 9 December 2009, the project must satisfy both of the following conditions:
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.
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.
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.
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 can't claim in respect of projects to develop innovative business products or services that don't incorporate any advance in science or technology.
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.
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.
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.
To qualify as R&D, any activity must meet the definitions set out by the Department of Trade and Industry (DTI). (This organisation is now known as the Department for Business, Innovation and Skills).These guidelines state that the activity must contribute directly to seeking the advance in science or technology or must be a qualifying indirect activity. (Follow the link below to read more about this).
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've 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.
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.
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.
Payments to clinical trials volunteers - the cost of relevant payments to subjects of clinical trials.
Utilities - power, water, fuel used directly in carrying out R&D, but not things like telecommunication costs and data costs.
Software - computer software used directly in the R&D.
Subcontracted R&D expenditure - if your company or organisation is claiming relief under the 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.
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 section in this guide on capital allowances and R&D.
Tax relief was only available if your company or organisation spent at a rate of at least £10,000 a year on qualifying R&D costs in an accounting period but this limit is removed for accounting periods ending 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.
The tax relief on allowable R&D costs incurred on or after 1 April 2012 is 225 per cent - that is, for each £100 of qualifying costs, your company or organisation could have its Corporation Tax profits reduced by an additional £125 on top of the £100 spent.
If instead there is an allowable trading loss for the period, this can be increased by 125 per cent of the qualifying R&D costs - so that's £125 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.
|R&D Relief||£20,000 × 125% = £25,000|
|Normal taxable profit||£25,000|
|Taxable profit less R&D Relief||£25,000 - £25,000 = 0|
|Revised taxable profit||0|
|R&D enhancement||£20,000 × 125% = £25,000|
|Normal trading loss||£10,000|
|Trading loss less enhanced by R&D Relief||£10,000 - £25,000 = £35,000|
|Loss available to carry forward or back for Corporation Tax purposes||£35,000|
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 and National Insurance contributions (NIC) 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. This restriction no longer applies for accounting periods ending on or after 1 April 2012.
|R&D enhancement||£20,000 × 125% = £25,000|
|Normal taxable profit||£5,000|
|Trading loss (after R&D Relief)||£20,000|
|R&D expenditure qualifying for conversion to credits||£20,000|
|Potential tax credit||£20,000 × 11% = £2200|
|PAYE and NICs liabilities (say)||£5,000|
|Payable tax credit||£2,200|
|Losses available to carry forward or back||Nil|
The rates for tax relief and tax credits were different before 1 April 2012.
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 can't claim anything under the 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:
If you do claim under the Large Company Scheme, then the large company rules apply. The rate of tax relief is lower, and you can't convert the relief into payable tax credits.
Before claiming, 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.
HMRC can ask questions about your claim if they decide to check it.
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.
You claim for R&D Relief by putting an X in either Box 99 (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 225 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 a 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 don't forget to 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:
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've 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.
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 can't 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.
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.
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 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.
There are specialist 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.
In addition, HMRC has a free pre-recorded 'webinar' that provides a basic overview and introduction to R&D tax credits and the Patent Box, and explains who is eligible to claim, how to make a claim and where to get further help and advice for your business.
But if your company's tax affairs are handled by the HMRC Large Business Service (LBS), you should contact your LBS office direct
The pilot to provide a formal system of advance assurance for R&D tax credit claimants proved popular with participating companies. However, the resource required to deliver this individual service was significant and it was recognised that this could not be sustained were the programme to be made available to all eligible customers.
The Government, therefore, has decided not to continue with the programme and will not offer a formal assurance scheme.
R&D specialist units will continue to offer support in respect of R&D claims. They will be available to help companies at any point in the claims process to make sure that eligible customers benefit from the tax credit schemes available.
If you participated in the pilot, you will continue to be supported for the agreed term.