How it works
Have you claimed R&D Tax Relief many times before?
Or are you completely new to the process?
Here’s everything you need to know:
The rules and how they are interpreted have changed over the recent years. So, it’s very important that we know the answers to 3 main questions before we start your claim:
Which work qualifies?
R&D for tax purposes has a very broad definition that allows us to look at any activities that contain technological problem solving. Parts of your project may be routine, or easy to solve, and you can’t claim these. But other elements may be more difficult – or, as the legislation says, ‘not readily deducible’.
R&D for tax purposes occurs when a company is seeking an advance in science or technology which may sound vague but thankfully there is supporting guidance that helps us interpret the legislation and tells us that you could be undertaking R&D if you are:
- Extending the boundaries of what's known in your field.
- Developing something that builds on existing knowledge: a product, material, process, or service that adds something new or more advanced to the field.
- Taking something that already exists and making it appreciably better. This isn’t just a tweak; it must be a technological improvement underpinned by science or engineering.
- Replicating an existing product or process but using a significantly different or new approach.
It’s important to bear in mind that, sometimes the most ‘innovative’ solutions are not always R&D for tax purposes. HMRC don’t just want to understand the ‘what’ behind what you have achieved, they need to understand the ‘how’ behind the methodology of reaching your solution.
Understanding what qualifies can be complicated, so our team are here to help you.
If it's a trade secret and the method your competitors used to reach the solution isn't publicly available or easily deducible by another specialist in your field, then potentially, yes!
However, you can’t claim for simple reproduction of a competitor’s solution. There must be some element of technological uncertainty.
Yes! The purpose of the R&D Incentive is to boost business-led innovation. These projects often come with commercial uncertainty as success isn’t guaranteed and the financial risk can be significant. The R&D Incentive helps to reduce that risk, encouraging businesses to pursue ambitious technical challenges that might otherwise be commercially out of reach.
So, if the business has invested time and money into attempting to develop a solution unsuccessfully, you are still able to claim. The R&D Incentive rewards companies that are actively seeking advances in science or technology (the word seeking is key).
Which costs can be claimed?
In order to work out which costs can be claimed, first we need to identify which projects, or parts of projects, involve qualifying R&D activities. Once we’ve nailed that down, we can take a closer look at the costs and work out which ones were linked to those R&D activities.
It’s about tracing the spend back to work that meets the criteria to ensure that we are only including costs that genuinely relate to solving those technical challenges. Costs that could be included in your claim are:
Staff Costs: A proportion of salaries, Class 1 National Insurance contributions, pension contributions, bonuses, staff training costs, and some reimbursed expenses can be included for employees directly involved in R&D activities qualify.
Consumables: Items which are have been used up or ‘transformed’ in the R&D process. This includes water, fuel and power but could also include elements like electrical components or chemicals converted into an unusable product.
You may be able to claim for materials used up to make a prototype as long as this prototype does not form any commercial value for the business. This means, typically the cost of consumables in ‘first of class’ prototypes can not be claimed.
Software Licenses: Typically, software may also be used for other general business activities, or non-qualifying R&D, in which case we must determine how much of the cost is directly attributable to R&D work.
Subcontractors: You can include subcontractor costs in your R&D claim, but the amount varies depending on who you’re working with:
- For unconnected subcontractors you can claim back 65% of the amount paid to them for qualifying activities.
- For connected subcontractors (like another company in your group), you can claim 100% of the lower value: either what you paid them or what it cost them to do the work.
Generally, you are unable to claim for subcontracting costs under the RDEC scheme.
Externally Provided Workers (EPWs): EPWs are temporary workers who are supplied by a third party, meaning you pay the agency or provider, not the workers themselves. They’re different from subcontractors because they work under the direct supervision and control of your business.
The good news is that EPW costs can be included under all R&D schemes. However, just like with unconnected subcontractors, you can only claim back 65% of the cost.
Clinical Trial Volunteer Costs: Payments to volunteers participating in pharmaceutical trials can be claimed
Cloud computing and data costs: For accounting periods beginning on or after the 1st April 2023 you are able to claim for some of these of your cloud costs.
If claiming for datasets that are used to facilitate your R&D work there are 2 things to be aware of.
- Firstly, if you’ve bought access to multiple datasets under a single agreement, and only some of them are used for R&D, only the portion of the cost related to your qualifying R&D activity can be included in your claim.
- Secondly, not all datasets are eligible. You can’t claim for data that:
- Can be resold to someone else.
- Comes with rights to share, publish, or distribute the raw data.
- Offers ongoing use beyond the lifespan of your R&D project.
In other words, if the dataset has a lasting value to your business outside of R&D, it’s unlikely to qualify.
Pure Mathematics: For accounting periods beginning on or after the 1st April 2023 you are able to claim for advancements in pure mathematics. Guidance published by HMRC states that “mathematical advances in themselves are treated as science for the purposes of these Guidelines, whether or not they are advances in representing the nature and behaviour of the physical and material universe.”
This means that even if your work with maths doesn’t involve a physical product, material, or tangible process it could still qualify as R&D. This is specifically relevant for businesses involved in developing models for Cryptography, Machine Learning & AI, Algorithm Design and Advanced Statistical Modelling
Remember, depending on what period you are claiming in and your tax position, some of these costs may be excluded or limited. Take the test to find out which scheme to claim under.
It doesn’t actually matter whether your R&D costs are shown as day-to-day expenses in your P+L or capitalised as an intangible asset on your balance sheet, both can still qualify for R&D tax relief as long as we distinguish which of those capitalised costs are eligible for R&D relief.
Which Scheme do I claim under?
How is my benefit calculated and what scheme do I claim under?
The definition of R&D for tax purposes is the same, regardless of what scheme you are claiming under. However, what you can claim, and your rate of benefit can vary from anywhere between 18.6% to 33.4% of qualifying expenditure dependant on the scheme you are eligible to claim under.
The quickest and easiest way to find out which scheme you should claim under is to pick up the phone and check with our team: +44 (0) 20 8088 2880
Or follow the steps below to check which rules apply for your current claim:
Did the accounting period start before 1st April 2024?
For claim periods starting before 1st April 2024
Importantly, this isn’t about when you spent the money, but when your accounting period begins. If your company year end is 31 March, the new R&D rules will apply to your accounting period that runs from 1 April 2024 to 31 March 2025. But if your year end is 31 December, you won’t switch to the new rules until your year ended December 2025, that starts on 1 January 2025.
If you are claiming for two years, one of which starts before and one of which starts after we will have to claim under two different schemes.
For claim periods starting before 1st April 2024, there is a simple test that helps businesses determine whether your business should be claiming under the SME scheme or RDEC scheme, however as with any rule; there are lots of exceptions! Depending on certain criteria and when the period you are claiming for falls, there will be different rules.
Follow the flow chart below to determine which incentive you should claim under for this accounting period.
What if we only just cross the SME threshold?
HMRC have built in some breathing room for businesses who organically fluctuate over the threshold. This means that, in the first year of going over or under the threshold you do not have to change which incentive you claim under; you will need two consecutive years to justify a change in status.
However, where there has been an acquisition, merger or linking which takes the business over the threshold, the year of grace does not apply.
Is the answer ‘yes’ to any of the following statements? Another company:
- owns more than 50% of your shares or voting rights.
- can appoint or remove your company’s management or key decision-makers.
- has the ability to strongly influence your business decisions (“dominant influence”).
SME scheme
You’ve determined that you should claim under the SME Incentive, so how is your benefit actually calculated?
Claiming R&D Tax Relief as an SME allows businesses to enhance the expenditure incurred on R&D Activities, this then changes your tax position which ultimately provides you with a cash benefit.
This doesn’t change your statutory accounts, and it won’t make your business look worse on paper. You don’t need to restate any previous years, and you don’t need to delay filing your accounts while your R&D claim is being finalised. This is something we’re often asked, but it’s a common misconception. Your claim is submitted to HMRC in your original tax return (CT600) or by an amendment to a previously submitted tax return.
HMRC allows you to enhance your expenditure by an additional 86% (or 130% for expenditure incurred before 1st April 2023). What that turns into in terms of cash back or tax saved depends on whether your company is making a profit or a loss.
How do I calculate my benefit as a Loss-making business under the SME scheme?
If the business was loss making for the period that you are claiming, qualifying R&D spend is enhanced by the 86% or 130% rate. This then gets added to your trading loss and can be surrendered to HMRC for a cash credit at a rate of 10% (for most companies) which means the cash benefit you can get is between 18.6% and 23% of your qualifying R&D spend.
There’s an exception to the standard 10% rate. HMRC will pay out at an enhanced rate of 14.5% of your surrendered loss if you are deemed an R&D intensive SME. You qualify as such if your R&D expenditure is 40% or more of your total expenditure.
There’s one more thing to be aware of if you are a loss-making company: the PAYE cap.
This means that your benefit is restricted to £20,000 plus 300% of the company’s relevant PAYE liabilities and National Insurance contributions. If your claim exceeds the cap, you can carry the extra credit forward to use in future years. You might be able to guess… there are also exceptions to the PAYE cap - our team will be able to help you assess whether this applies to your business.
How do I calculate my benefit as a Profitable business under the SME scheme?
If your business is making a profit for the year that you are claiming, you won’t receive a cash credit, but you can reduce your corporation tax bill or receive a tax refund for overpaid tax.
To calculate your benefit, we take your qualifying R&D spend and apply the 86% or 130% uplift. This is then deducted from your taxable profits. That gives you a lower tax profit figure and therefore, a smaller tax bill. The difference between your original and reduced tax bill is the value of your R&D claim.
I received external funding for a project, am I still eligible to claim under the SME scheme?
This may affect which scheme you claim under for this specific project if the funding is deemed to be notified state aid (such as Innovate UK Grants). Notified state aid cannot be claimed more than once for the same project. Since the SME scheme is also deemed notified state aid, you may have to claim some projects under the RDEC scheme.
If the funding was project specific, then any projects for which funding wasn’t received may still be claimed under the SME scheme. However, if the funding isn’t tied to a specific project, then the whole claim for this period may fall under the RDEC scheme.
Some of the work that I am claiming was contracted to me by another company, am I still eligible to claim?
There has been significant controversy and uncertainty around HMRC’s view as to whether this type of work is categorised as ‘subcontracted/subsidised’, meaning that it must be claimed under the RDEC scheme.
Following several tribunal cases, HMRC have given updated clarification (Go to ‘Contracted out R&D) on the interpretation of subsidised and subcontracted expenditure in R&D projects. This can be a tricky area, especially if the work is collaborative or part of a complex supply chain. We can help you review your contracts and relationships to see what’s eligible.
It’s important to remember that these rules only apply to accounting periods starting before 1st April 2024, so make sure to check out the which scheme you fall into.
Some of the work that I am claiming was contracted to me by another company, am I still eligible to claim?
There has been significant controversy and uncertainty around HMRC’s view as to whether this type of work is categorised as ‘subcontracted/subsidised’, meaning that it must be claimed under the RDEC scheme.
Following several tribunal cases, HMRC have given updated clarification (Go to ‘Contracted out R&D) on the interpretation of subsidised and subcontracted expenditure in R&D projects. This can be a tricky area, especially if the work is collaborative or part of a complex supply chain. We can help you review your contracts and relationships to see what’s eligible.
It’s important to remember that these rules only apply to accounting periods starting before 1st April 2024, so make sure to check out the which scheme you fall into.
Linked enterprise rules
Yes - This means your business is part of a linked enterprise and must combine the financials and staff counts of your business and other linked enterprises in ‘the test’. If your company still falls below this threshold then you should explore the SME scheme, otherwise the business is deemed a large company, and you should claim under the RDEC scheme.
Does a larger business or investor own between 25%-50% of your business, or vice versa?
SME scheme
No – SME scheme
Partner enterprise rules
Yes – This means you are part of a partner enterprise and must proportionately pro rata the partner enterprises financials and staff counts when applying ‘the test’.
For example, if your business has 20 staff & balance sheet gross asset value of £5mill, and the partner enterprise, which owns 40% of your business has 100 staff and has balance sheet gross asset value of £30mill the calculation would be as follows:
- Staff costs: 20 + (40% 100) = 20 +40 = 60
- Balance sheet: £5mill + (40% £30mill) = £5mill + £12mill = £17mill
If your company still falls below this threshold then you should explore the SME scheme, otherwise the business is deemed a large company, and you should claim under RDEC.
[Extra Info, don’t really want to include this on the main page of the flow chart but would be good to find a way to incorporate the extra info] The exceptions to the rule
Certain types of investors are recognised as “excluded investors”, which means their involvement doesn’t deem you a partner enterprise:
Venture capital firms and public investment bodies
Business angels (individuals or groups making regular venture investments), so long as their total investment stays under €1.25 million
Universities and non-profit research centres
Institutional investors (like regional development funds)
Autonomous local authorities with small budgets and populations
As long as none of these investors own more than 50% of your business and aren’t linked to one another, you don’t need to consider their involvement in other entities and the financials/staff counts associated to those entities.
If you’re not sure how your investor relationships affect your eligibility, just reach out. We’re happy to take a look at your company’s setup and guide you through it.
Claiming under the RDEC scheme
So, you’ve determined that some or all of your claim must be made through the Research and Development Expenditure Credit scheme (RDEC). This pays businesses 20% (or 13% for expenditure incurred before 1st April 2023) of their qualifying expenditure as an ‘above-the-line’ credit, meaning it is treated as income and therefore taxable at the relevant Corporation Tax rate.
For the most part, businesses claiming under RDEC can claim on the qualifying costs we covered earlier. However, there are some differences when it comes to subcontractor costs. If you’re subcontracting to a limited company (which is often the case in commercial R&D projects) you typically can’t claim these costs. There are exceptions if the work has been carried out by specific types of organisations or people:
You can include subcontractor costs if the work is done by:
- A qualifying body like a university, NHS trust, or other research institution
- An individual
- a partnership, each member of which is an individual (rather than a company)
I received external funding for a project, am I still eligible to claim under RDEC?
Notified state aid cannot be claimed more than once for the same project. However, as RDEC is not notified state aid, receiving external funding should not have an effect on your claim. This means that you can claim for both grant-funded and non-grant-funded R&D under RDEC.
It’s important to remember that these rules only apply to accounting periods starting before 1st April 2024, so make sure to check out the Merged Scheme for any claims relating to later periods.
Post 1st April 2024
For accounting periods starting on or after 1 April 2024, the old SME and RDEC schemes have been rolled into one new, simplified R&D scheme and applies to all companies regardless of size.
It’s still important to determine whether you are an SME or not in order to establish whether you should claim under the R&D Intensive scheme (ERIS) or the Merged Scheme.
Take the stress out of your R&D claim
Whether you need end-to-end support or expert review, we’ll tailor our service to fit you — and help you claim more, with less hassle.
