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R&D Tax Credits

About R&D tax credits

Research and development (R&D) helps companies improve profits and grow by creating new high value-added products, processes and services.

The R&D tax credits help companies to invest more in R&D either by reducing a company's tax bill or, for some small or medium sized companies (SMEs) not in profit, by providing a cash sum.  The R&D tax credits are available to companies throughout the UK.  Further enhancements to the credits were announced in the 2007 Budget (see below).

R&D Tax Credits are the biggest single funding mechanism for business R&D provided by Government.   Developed through consultation with business they are at the heart of the Government’s strategy to raise levels of business R&D and encourage business innovation.

Even so, many UK companies miss out on this incentive.  They do not appreciate that they are performing R&D for which they can claim - or that the claiming process is straightforward.  For a brief overview of what’s involved in claiming see our leaflet R&D Tax Credits: What's in it for you? and also our case studies. The case studies give practical examples of the wide range of companies that have claimed, including advice about preparing the first claim.  BCC, CBI, Design Council, EEF and Business Link have endorsed both the leaflet and case studies.

R&D Tax Credits: What's in it for you?  and Applying for R&D Tax Credits: Case Studies of Companies' Experiences

Important Note: Claims time limit change

The Finance Act 2006 introduced changes to the rules, reducing the time limit for claiming tax relief from six years to two years from the end of the accounting period.  (The time limit for SMEs not in profit to claim a cash payment was already two years).

A transitional period ending 31 March 2008 covering accounting periods ending after 31 March 2002 but before 31 March 2006, allows companies to continue submitting claims for this period until 31 March 2008.  Companies are urged to ensure that they meet this deadline.

Please note that the time limit for submitting all claims for accounting periods ending on or after 31 March 2006 is two years.

For further details see: http://www.hmrc.gov.uk/briefs/company-tax/brief7007.htm

Improved Processing of claims

This has been facilitated with the launch by HMRC on 1 November 2006, of a series of r&d specialist units dedicated to this task.  This should lead to greater consistency in dealing with claims and more certainty for companies making claims.  The specialist units will deal with claims from small and medium enterprises under Schedule 20, Finance Act 2000 as well as claims by large companies under Schedule 12, Finance Act 2002 and claims to vaccine research relief under Schedule 13 Finance Act 2002.  The specialist units are based in: Cambridge; Croydon; Leicester; Maidstone; Manchester; Southampton; Cardiff  (covering Wales, Scotland and Northern Ireland).  The Cardiff unit will have a small satellite office in Scotland to carry out customer service and enquiry work there.  For further information see: http://www.hmrc.gov.uk/randd/special-units.htm

Am I doing R&D?

The guidelines on the meaning of R&D for tax purposes  issued by the Secretary of State for Trade and Industry outlines the full definition of R&D for tax purposes.

A basic definition is "work to resolve scientific or technological uncertainty aimed at achieving an advance in science or technology".  Advances include new or improved products, processes and services.

Broader innovation in products, processes and services (e.g. proprietary content, non-technical design or developing other non-technological unique selling points) isn't R&D - but it may still be a good idea!

If it's obvious to a professional how to do something, doing it isn't R&D.  If there is a 'non-obvious' scientific or technological problem around how to do something, then doing it is probably R&D.

As a rule of thumb, developing information or other 'content' is not R&D, but developing the means to deliver 'content' can be R&D.

Can I benefit from R&D tax credits?

All companies with qualifying spending over £10,000 a year on R&D are entitled to a deduction when calculating their taxable profits of

• 150% of qualifying expenditure for SMEs or
• 125% of qualifying expenditure for larger companies,

reducing the company's UK corporation tax bill accordingly.

Companies can claim R&D Tax Credits for their revenue expenditure on:

• employing staff directly and actively engaged in carrying out R&D,
• paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D,
• consumable or transformable materials used directly in carrying out R&D (broadly, physical materials which are consumed in the R&D), and
• power, water, fuel and computer software used directly in carrying out R&D.

Capital expenditure is not eligible - this may be covered by 100% capital allowances (Research & Development Allowances) instead.

Am I eligible?

If you spend at least £10,000 in the accounting period on qualifying R&D you should consider putting in a claim for the tax credit.  There is no upper limit.

Broadly speaking, to claim under the SME scheme, you should be a small or medium sized company.  This means you must have fewer than 250 employees with either an annual turnover not exceeding €50m or a balance sheet totalling €43m, and not be part of a larger Enterprise that would fail these tests.  Other companies should apply for the large company scheme.

SMEs not in profit can get a cash payment of up to 24p per £1 of qualifying expenditure instead of deducting 150% of R&D expenditure when calculating their profits - thus getting money to support R&D while the company is loss-making.

There are special (State Aid) rules for R&D by SMEs that is funded by others (e.g. Technology Programme or (Grant for R&D).  

The rules, which relate to notified programmes, mean that tax credits under the SME scheme is not available, but a claim at the large company rate may instead be available - for a detailed explanation see http://www.hmrc.gov.uk/manuals/cirdmanual/cird81670.htm.   Each notifiable state aid has a specific number which can be traced via the attached link using 'Edit', 'Find on this Page' facility  http://ec.europa.eu/comm/competition/state_aid/register/ii/by_ms_gbr.html.

Help for SMEs

A new guide to R&D tax credits for SME companies and their advisers is now available. Developed by DIUS (formerly DTI) and HM Revenue & Customs with input from small companies, the guide includes information on how the R&D tax credits scheme works, what can be claimed and how to claim.  It highlights some common errors to avoid and provides a number of tools to make claiming easier.  You can also use a new interactive tool developed by Business Link in partnership with HM Revenue and Customs and DIUS, which helps a company to find out whether it may be eligible for the R&D Tax Credit by answering a simple series of questions, which takes five minutes.

Differences between the SME and large company schemes

SME scheme

• 150% rate of enhanced deduction
• Payable credit at £24 for every £100 of qualifying expenditure on R&D
• Company can claim for expenditure on R&D it sub-contracts to others
• Company cannot claim for contributions to independent research
• Claim can be reduced if the R&D project is subsidised or a grant is received in respect of it
• Company must own the intellectual property arising out of the R&D Large company scheme

Large company scheme

• 125% rate of enhanced deduction
• No payable credit
• Company can claim for contributions to independent research
• Company can only claim for expenditure on R&D it carries out itself, unless it sub-contracts R&D to universities, charities or public sector research establishments
• No reduction for grant or subsidy
• Company need not own the intellectual property arising out of the R&D

How do I claim R&D tax credits?

A company claims R&D tax credits in its company tax return (Form CT600).  For your first claim, you may want to seek professional advice. Full details of the R&D tax credits legislation, including how to claim, are provided in the HM Revenue & Customs' Corporate Intangibles Research and Development (CIRD) manual. Alternatively, information can be obtained by contacting your Local Tax Office Corporation tax team.

Budget 2007 announcements on the R&D tax relief scheme

The Government intends to increase the support available under R&D tax credits. The rate of relief for large companies will increase to 130% of qualifying R&D expenditure. In the case of the SME R&D tax credit scheme, the rate of relief will increase to 175% for companies claiming enhanced deductions against profits. The value of the payable credit available will remain broadly at its current value (24% of qualifying expenditure). The Government intends to legislate these changes in Finance Bill 2008. Changes to the SME scheme will be subject to state aid approval from the European Commission.

Legislation will be introduced in Finance Bill 2007 to extend the support available under the SME R&D relief scheme to companies with fewer than 500 employees.

The Government also intends to make a minor amendment to the Vaccine Research Relief scheme in order to correct an unintended error in the legislation. The amendment to the Vaccine Research Relief Scheme will have effect on and after 1 April 2007.

The extension of support available to companies with fewer than 500 employees will have effect from a date to be appointed by Treasury Order. The Government is currently in discussions with the European Commission to ensure that any extension to the SME scheme meets with EC state aid approval rules. The appointed date will be announced once approval has been received.

Where can I get help and further information?

Detailed information about R&D tax credits, which can help you understand what and how to claim, is available via the HM Revenue & Customs' website

It can be a good idea to discuss a possible claim in advance with your tax inspector. It can save wasted effort for you and for them!

Professional advisers such as your accountant can help you make a claim, but charge fees.

Trade associations and professional networks may help put you in touch with other companies with experience of claiming R&D tax credits.

Other R&D and innovation support

If you are involved in R&D you may be able to claim 100% capital allowances for your R&D capital spending.

The Business Link Grants and Support Directory provides tailored business support solutions designed to meet different stages of business's development and growth, including grants, for innovation and science.

The new Technology Strategy Board (TSB)  will be formally inaugurated in July, 2007 with a wider remit to stimulate business innovation in areas offering greatest scope for boosting UK growth and productivity. Operating at arm’s length from central Government, the TSB's aims will be to promote and support research into, and the development and exploitation of, science, technology and new ideas for the benefit of business, in order to increase economic growth and improve the quality of life in the UK.

The TSB has executive responsibility for delivering a programme of Government financial support through appropriate mechanisms, including Collaborative R&D, Knowledge Transfer Networks and Knowledge Transfer Partnerships, to encourage business investment in, and use of, technology across all sectors of the UK economy.

The Small Business Research Initiative (SBRI) is an initiative designed to help SMEs gain greater access to publicly funded Research and Development (R&D) contracts.  Supplier route to Government is a new service designed specifically to give companies easy access to lower-value contract opportunities (typically worth under £100,000) offered by the public sector.

The R&D Scoreboard evidences the benefits to companies of R&D investment, and reports the performance of the top UK and global companies investings in R&D.