R&D Tax Credit
R&D tax credits allow companies to be partially reimbursed for investing in new products and services.
Being innovative allows companies and the UK to stay competitive and to deliver solutions to challenges facing society and the wider economy. But investing in new solutions can be expensive, so the government’s financial incentive reduces the cost to your business.
Below we explain how the UK’s R&D tax credits work, how to apply and how you could get an R&D tax credit loan through Funding Guru.
Thoughts from Matt
“Too many businesses fail to apply for R&D tax relief because they think they aren’t eligible or they aren’t even aware it exists.
In fact, a large number of UK businesses are eligible for the scheme. By not applying, you lose out on free cash that could be put to good use to grow your business.
You can apply up to two years after the end of the financial year relating to the R&D spend. So it’s worth thinking about whether you meet the R&D tax credit criteria for historical years so you can get the benefits today.“
Matt Haycox
Founder and CEO, Funding Guru
What are R&D tax credits?
Research and development (R&D) tax credits were introduced in 2000 to encourage SMEs to develop scientific and technological innovations. The scheme was expanded to larger companies in 2002 and has evolved over the years.
Put simply, it gives companies a financial incentive to invest in innovation.
There are tens of thousands of R&D tax credits claims from UK companies each year, making the scheme a key form of support for UK entrepreneurs.
There are two R&D tax credit schemes, one aimed at larger companies and the other for SMEs.
These are:
- Research and Development Expenditure Credit (RDEC)
- Small and medium enterprises (SME) R&D relief
We explain how they both work in more detail below.
Research and Development Expenditure Credit (RDEC)
- Allows companies to claim credit worth 13% of qualifying R&D expenditure (increasing to 20% from 1 April 2023)
- This rate is paid after corporation tax (currently 19%) is applied, meaning you receive 11p for every £1 spent on qualifying R&D
- Your company can claim the credit as a cash payment if you are loss making and have no corporation tax liability
Costs you can claim for RDEC
- A proportion of staff salaries
- Employer national insurance contributions
- Pension contributions
- Specialist support staff
- Subcontractor costs if undertaken by a charity, higher education institute, scientific research organisation, health service body, an individual or partnership of individuals
- Materials
- Utilities
The below examples show how claiming R&D tax credits could reduce your corporation tax bill.
Profit / (loss) | R&D spend | Enhanced R&D qualifying spend | Revised profit / (loss) | Corporation tax saving | Tax credit received | |
SME | £200,000 | £50,000 | £50,000 x 130% = £65,000 | £200,000 – £65,000 = £135,000 | £12,300 | |
SME | £300,000 | £100,000 | £130,000 | £170,000 | £24,700 | |
SME | (£250,000) | £100,000 | £100,000 x 130% = £130,000 | (£380,000) | • £100,000 x 230% = £230,000 | |
RDEC | £10m | £2m | £2m x 13% = £260,000 | £260,000 x 19% = £210,600 | £210,600 |
- Work out the costs that were directly attributable to R&D
- Reduce any relevant subcontractor or external staff provider payments to 65% of the original cost
- Add all the costs together
- Multiply the figure by 13% to get the expenditure credit
- Enter this figure into your tax return
- Aimed at companies with less than 500 staff, a turnover of under €100m or a balance sheet total under €86m
- Allows companies to make an additional deduction against profits of 130% of R&D qualifying costs, in addition to the normal 100% deduction, taking the total to 230%.
- From 1 April these amounts drop to 86% of qualifying costs, taking the total to 186%.
- Claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss (falling to 10% on 1 April 2023).
- You cannot claim SME R&D relief if you’re already receiving other forms of state aid
- Subcontractor costs can be included in a claim, and you can receive 65% of the relevant costs of using subcontractors
There are a wider range of costs that can be claimed for SMEs than larger companies, including:
- A proportion of staff salaries
- Employer national insurance contributions
- Pension contributions
- Specialist support staff
- Subcontractor costs
- Materials
- Utilities
- Software licence fees
- Software partly used in your R&D activities
- Payments made to volunteers involved in clinical tests
The Treasury launched a consultation in January 2023 to consider merging the two schemes into one that covers both SMEs and larger companies. The eight-week consultation runs until 13 March 2023, with stakeholders and interested parties advised to give their thoughts.
The aim is to simplify the scheme, making it easier to apply and understand – particularly for companies who may make claims under both the RDEC and SME schemes.
The idea is to merge the two schemes into one similar to RDEC. The benefit of this is that the exact cash value of tax credit is known earlier than the SME scheme, where corporation tax deductions are only known with certainty after the end of the accounting period.
As part of the consultation, the Treasury is considering:
- How can R&D relief be claimed if using a subcontractor?
- Should a spending limit be implemented in order to qualify for R&D tax relief?
- Should the government provide more generous support for different types of R&D?
- Should the merged scheme start on 1 April 2024?
How to claim R&D relief
R&D tax relief is available to a wide range of companies – you just have to show your projects were science or technology related.
You can make an R&D relief claim up to two years after the end of the accounting period it relates to.
You claim the relief by treating it as a deduction from the company’s profits for the financial period. Your claim must be made in the company tax return or an amendment to the return.
To claim, your company must send a full company tax return form (CT600).
In some cases, SMEs cannot use the SME R&D scheme and must claim through RDEC.
Once you have submitted your application, HMRC will pay you a tax credit if your application is approved. HMRC aims to make payments within 28 days.
What is an R&D tax credit loan?
R&D tax credits are a reliable form of income from HMRC, but the funding can be slow to materialise – not least because SMEs can only file for R&D tax credits at the end of their financial year.
You could consider an R&D tax credit loan if you want payment faster than this. As a lender, we take future tax credit payments due from HMRC as security against the loan. It means you can access the cash credit quicker for working capital or to invest in further innovation.
We advance up to XX% of a future R&D tax credit refund.
Like any form of borrowing, you will pay interest and fees. The loan should be repaid once HMRC has processed your R&D tax credit claim and paid you the funds.
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