Business tax – guidance

Corporation Tax: Research and Development tax relief

Find out about Corporation Tax (CT) Research and Development (R&D) tax relief, qualifying projects and costs, claiming and keeping records.

Overview

R&D is a Corporation Tax (CT) tax relief that may reduce your company’s tax bill. This tax relief can only be claimed if your company is liable for CT.

R&D tax relief schemes

The way you claim tax relief depends on the size of your company:

R&D projects that might qualify for relief

Your company can only claim for R&D tax 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.

The project must relate to your company’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 tax relief under the SME scheme it must own any intellectual property that might arise from the project.

How to show the project is R&D within the tax definition

There are guidelines that define the following terms. These will help you decide if your company has an R&D project for tax purposes:

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

Give an explanation of each of the following, when filing your CT Return, to show that the definition of R&D applies to your project or projects.

Scientific or technological advance

Consider what scientific or technological advance is being sought. This focuses attention on the project’s aim for an advance. This is important in judging whether or not R&D for tax relief purposes is being undertaken. Science doesn’t 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 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, isn’t 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.

Set out at a high level, in a way that can be understood by someone who’s not an expert, what the uncertainties were and when they started and ended.

How and when the uncertainties were actually overcome

Describe the methods taken to overcome the uncertainties and the investigations and analysis undertaken. This shouldn’t be in great detail, but enough to show it wasn’t straightforward. Describe the successes and failures and the impact of these on the overall project. If the uncertainties weren’t overcome, explain what happened.

Why the knowledge being sought was not readily deducible by a competent professional

It might be publicly known that others have tried to resolve the uncertainties and failed. Or maybe others have resolved the uncertainties, but precisely how it was done isn’t in the public domain. In either case a valid technological uncertainty can still exist.

Or there’s little public information available about the project, you’ll need to show that the people leading it are 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.

Costs that qualify for R&D tax relief

To qualify as R&D, any activity must meet the definitions set out by 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, you can claim tax relief on revenue expenditure in the areas outlined. This means the day to day running costs of the business, not capital expenditure on assets.

If you’ve spent money on something like, for example, 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

This relates to 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 . They shouldn’t be 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. Employee costs that qualify for R&D tax 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. Staff provider costs that qualify for R&D tax 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. Materials costs that qualify for R&D tax relief

Payments to clinical trials volunteers

The cost of relevant payments to subjects of clinical trials. Clinical trial costs that qualify for R&D tax relief

Utilities

Power, water, fuel used directly in carrying out R&D, but not things like telecommunication costs and data costs. Power, water and fuel costs that qualify for R&D tax relief

Software

Computer software used directly in the R&D. Computer software costs that qualify for R&D tax relief

Subcontracted R&D expenditure

If your company or organisation is claiming tax relief under the SME Scheme then you may be able to claim back 65% 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 you have jointly elected for connected parties treatment, special rules apply.

If your company isn’t an SME, you can only claim expenditure on activities that are undertaken directly on its behalf by certain specific kinds of subcontractor. Subcontracted R&D activities that qualify for R&D tax relief

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

Capital expenditure

Although R&D tax relief is only available for ‘revenue expenditure’ - generally day-to-day running costs, rather than 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 difference between revenue and capital expenditure in the Business Income Manual.

How and when to claim R&D tax relief

Before claiming, read all of this guide, and the detailed technical material referred to, to make sure that your company meets the necessary conditions and that in your view, the project and expenditure qualify for tax relief.

HMRC compliance checks and enquiries for Corporation Tax

When to claim

You must make any claim for R&D tax relief in your CT return or amended return. The normal time limit for making your claim is 2 years after the end of the relevant CT accounting period.

How to claim

You claim for R&D tax relief by putting an X in either box 99 (SME) or box 100 (large companies) of your CT return, and in both cases, put the enhanced expenditure in box 101 - that is, the actual amount spent multiplied by 230% 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 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 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

How to complete and file your Company Tax Return

How you’ll get your R&D tax relief or tax credit

If you’re just claiming relief, this will reduce your company or organisation’s profit chargeable to CT 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, 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 the balance will be paid.

R&D Advance Assurance

Your company many qualify for Advance Assurance.

Once a company’s application for Advance Assurance has been accepted, for the first 3 accounting periods of claiming R&D tax relief, HMRC will allow the claim without further enquiries.

Find out more about Advance Assurance and see if your company could qualify. There is also a pre-recorded webinar giving an overview to Advance Assurance.

Capital allowances and R&D tax relief

R&D tax relief only applies to revenue expenditure - generally, costs incurred in the day-to-day running of the business, not 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 tax relief.

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

Record keeping

There’s no specific record keeping requirement for R&D tax relief claims. But the general CT requirement to keep sufficient records to support the entries on your CT return still applies.

HMRC doesn’t expect you to create new primary business records just for an R&D tax relief claim. But you may need to maintain your business records in a different way, so you can 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 CT return or R&D tax 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 able to help 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 tax relief, contact the appropriate specialist unit. You can contact them before making a R&D tax relief claim, or while you are putting together your claim.

HMRC also has a free pre-recorded webinar giving 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.