Business tax – guidance

Corporation Tax: Research and Development (R&D) Relief

Guidance for companies on how to qualify for, calculate and claim R&D Relief.

Overview

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 and Customs (HMRC)

But your company or organisation can only claim R&D Relief if it’s liable for Corporation Tax.

R&D relief schemes

Your company or organisation can only claim R&D Relief if it’s liable for Corporation Tax.

There are 2 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

Research and Development Expenditure Credit (RDEC) Scheme

The RDEC scheme has been introduced for expenditure incurred on or after 1 April 2013. It will initially be optional, running alongside the Large Company 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% of qualifying R&D expenditure.

What is a 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% in your company and/or any company your company holds a 25% 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 isn’t 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.

Subcontractors

You can’t claim R&D Relief under the SME Scheme if you’re a subcontractor - that is, if you’ve 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.

The Small and Medium-sized Enterprise Scheme

This scheme has higher rates of relief. From 1 April 2012, the tax relief on allowable R&D costs is 225% - 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.

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 isn’t 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.

The Large Company Scheme

If your company isn’t small or medium-sized, then you can only claim under the Large Company Scheme.

Amount of expenditure

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

Rate of tax relief

From 1 April 2008, the tax relief on allowable R&D costs is 130% - 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’s an allowable trading loss for the period, this can be increased by 30% 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.

R&D projects that 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 SME 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.

Find out what related to a trade means for R&D Relief purposes

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:

  • project
  • advance in science or technology
  • science
  • technology
  • directly contribute
  • scientific or technological uncertainty

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.

1. 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 can’t claim in respect of projects to develop innovative business products or services that don’t incorporate any advance in science or technology.

2. 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 aren’t 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.

3. 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 weren’t overcome, explain what happened.

4. 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 isn’t 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 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.

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. Find out what employee costs qualify for R&D Relief.

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. Find out what external staff provider costs qualify for R&D Relief.

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 out what materials costs qualify for R&D Relief.

Payments to clinical trials volunteers - the cost of relevant payments to subjects of clinical trials. Find out what clinical trial costs qualify for R&D Relief.

Utilities - power, water, fuel used directly in carrying out R&D, but not things like telecommunication costs and data costs. Find out what power, water and fuel costs qualify for R&D Relief.

Software - computer software used directly in the R&D. Find out what computer software costs qualify for R&D Relief.

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. Find out what subcontracted R&D activities qualify for R&D Relief.

If the subcontractor is a connected party you can read the special rules for R&D Relief in the Corporate Intangibles Research and Development Manual.

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’re involved in R&D and you spend money on capital assets, you may be able to claim R&D capital allowances.

Read more about the distinction between revenue and capital expenditure in the Business Income Manual.

How much R&D Relief SMEs can claim

Amount of expenditure

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.

Rate of tax relief or credit

The tax relief on allowable R&D costs incurred on or after 1 April 2012 is 225% - 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’s an allowable trading loss for the period, this can be increased by 125% 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.

Example - R&D Relief for expenditure of £20,000 where the company has made a profit of £25,000

Calculation step Amount
R&D expenditure £20,000
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

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 × 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 liabilities for that period. The amount of tax credit you can receive is limited to the total of PAYE and National Insurance contribution 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.

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 × 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 National Insurance contributions liabilities (say) £5,000
Payable tax credit £2,200
Losses available to carry forward or back Nil

You find out how to convert tax relief into payable tax credits in the Corporate Intangibles Research and Development Manual. The rates for R&D tax Relief for SMEs before 1 April 2012 were different.

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 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 the following apply:

  • 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 can’t convert the relief into payable tax credits.

Find out whether a grant will reduce the amount of R&D Relief you can claim

Find out whether a subsidy will affect a claim for R&D Relief

How and when to claim R&D Relief

Before claiming, you should read the rest of this guide, and the detailed technical material referred to, to make sure 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.

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 2 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 (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% or 130% 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’ll 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:

  • tell them why the company or organisation considers its project(s) to be allowable as R&D
  • provide a summary of the costs incurred on the R&D and how the figures in the return were arrived at

Find out how to complete and file 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’ve chosen to give up your enhanced relief to receive tax credits instead, or if you’ve 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.

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 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.

You can read more about R&D Relief for capitalised expenditure in the Corporate Intangibles Research and Development Manual.

Record keeping for R&D Relief

There’s 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.

You can read more detailed guidance on keeping records for R&D claims in the Corporate Intangibles Research and Development Manual

Further information

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’ve 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 a Customer Relationship Manager (CRM) in HMRC Large Business, you should speak to your CRM or contact your Large Business office direct.