Research and Development (R&D) Tax Credits: What are they and how can you claim them?

Understanding R&D tax credits

If you’re working on a scientific or technological innovation in the UK, Research and Development (R&D) tax credits could help fund your work. This vital cash injection can help finance your project, reduce the costs of your innovation, hire new staff and ultimately grow your business.

To be eligible you must be working on a specific scientific or technological project. You cannot claim R&D tax credits if the advance you’re working on is in the arts, humanities or social sciences, including economics. The project must also relate to your company’s existing trade or one that you intend to set up based on the results of the research and development you’re conducting.

As part of your claim, and to be deemed eligible for funding, you’ll need to explain how your project is:

1. Looking for an advance in the field
2. Trying to overcome a scientific or technological uncertainty
3. Cannot be easily worked out by a professional already working in the field

Who qualifies for R&D tax credits?

There are two types of R&D tax relief, depending on the size of your company. If you have fewer than 500 staff and a turnover of less than 100 million euros, or a balance sheet total under 86 million euros, you’re entitled to R&D tax relief for small or medium sized companies (SME). When working out if you’re an SME, you’ll need to include the figures of any partner or linked organisations you work with on the project to create an accurate total number.

If you don’t meet those requirements, you’re categorised as a large company in which case you’re still entitled to R&D expenditure credit (RDEC). RDEC can also be claimed by SMEs who have been subcontracted to work on an R&D project by a large organisation and would, therefore, be ineligible for the R&D relief for SMEs.

R&D tax credit for SMEs can be claimed for a project that is seeking a scientific or technological advancement in any sector. The project could include researching or developing a new process, product or service, or improving an existing one.

To find out what other financial relief you may be entitled to through HMRC, read our Small Employers’ Relief guide here.

How do R&D tax credits work?

HMRC R&D tax relief allows companies to deduct an extra 86% of their qualifying costs, in addition to the normal 100% deduction from their yearly profit. This means your R&D calculation would have a total of 186% deduction. If you’ve not claimed tax relief before on R&D projects, you may be able to apply for advance assurance too.

You can also choose to claim a payable credit if your company is making a loss – the payable credit is worth up to 10% of the surrenderable loss.

For accounting periods beginning from 1 April 2023, you must tell HMRC you’re going to claim R&D tax relief. From 8 August 2023, you must also submit an additional information form about your activities before submitting your claim. Once these are completed, you can file for your R&D or RDEC tax relief through your company’s tax return.

Benefits of claiming R&D tax credits

Claiming your R&D tax credits will enable you to reduce your corporation tax bill or receive a cash refund. The benefits of R&D tax credits mean your money can go further, enhancing the prospects of your project, and helping your company to realise its full growth potential.

How to claim R&D tax credits

When claiming research and development tax credits, you must figure out if you’re a qualifying SME, rather than a large company working on an R&D project. (See above: Who qualifies for R&D tax credits.)

Once you’ve determined this, you can follow these steps to claim your R&D credits.

Step One: Identify your qualifying R&D activities

The first step to claiming R&D tax credits is identifying the activities and expenditures that qualify for relief. You can only claim tax credits for costs that have been incurred from the start to the end of your scientific or technological project.

Costs that can be included in your calculation include consumable items, clinical trials volunteers, data licence and cloud computing, externally provided worker costs, staff costs, software and subtractor costs. You can double check what costs can be included on the HMRC website.

Step Two: Calculate your R&D spend

The tax credits are calculated based on what you’ve spent on R&D. To make an R&D credit calculation, first figure out your enhanced expenditure by:

• Working out the costs that are directly attributable to R&D (see above: Identify your qualifying R&D activities)
• Reducing any relevant subcontractor or external staff provider payments to 65% of the original cost
• Adding all the costs together
• Multiplying the figure by 86%
• Adding this to the original R&D expenditure figure

Step Three: Submit your R&D claim to HMRC

Before claiming your R&D tax relief, you must:

• Check if you need to submit a claim notification form to tell HMRC in advance of your claim (for accounting periods beginning on or after 1 April 2023)
• Submit an additional information form to support your claim (from 8 August 2023)

If you do not complete these steps your claim may be ineligible.

Once you’ve completed these steps, you can submit your R&D claim to HMRC through your company tax return

If your tax relief claim covers more than 12 months, you’ll need to submit a separate claim for each accounting period. You can claim tax relief for up to two years after the end of each accounting period it relates to.

Changes to R&D tax credits in 2023

R&D tax credits have changed in 2023. It’s important to stay up to date with the latest tax regulations as your business has likely been affected by these changes, and if you don’t account for them in your upcoming submissions then HMRC could reject your claim.

Changing rates of R&D tax relief

The R&D changes in April 2023 mean that the SME R&D tax credits scheme will decrease, whilst the RDEC rates for larger organisations will increase.

In the previous R&D tax credits scheme for SMEs, profitable SME companies were able to claim 130% on qualifying expenditure; this has now been reduced to 86%. If you were a loss-making SME, previously you could claim 14.5% of qualifying expenditure as tax credit, which has now been reduced to 10%.

New rules for qualifying software expenditure

The UK government has extended the scope of qualifying expenditures to include the costs of datasets and cloud computing. These changes are particularly useful to those innovating within AI and machine learning.

You can now include the cost of creating, running and maintaining machine learning (as it comes under cloud computing costs), the cost of acquiring datasets for training or testing, and pure mathematics (which is seen as an allowable expenditure due to it often leading to software development).

Find out more about staying on top of your digital record keeping in our guide.

New claim requirements

How to claim R&D tax credits has changed as of 8 August 2023. You must now submit an additional information form (AIF) which contains detailed financial and technical information about your development work.

If you don’t submit the AIF, HMRC will automatically reject your claim.

Get expert support on your upcoming R&D claim with Xero

Think you might be entitled to R&D tax credits?

Using accounting software can make it easier to file and claim such tax relief. Xero can provide a convenient, easy-to-use tool for your accountants and bookkeepers to submit their claims successfully. They can also contact Xero for more information.

And don’t forget, you can get extra support at the cash flow hub which is full of useful advice and tips on cash flow management for your business.

Try Xero’s easy to use accounting software for small businesses.