Introduction to R&D tax credits

What are R&D tax credits?

The UK government’s R&D tax credits scheme is designed to stimulate innovation in the UK economy. The program provides UK businesses with either a cash credit or corporation tax deduction to compensate for up to 33% of the cost of their research and development.

The scheme is available to businesses in all sectors, as long as your activity counts as R&D. So if you’re developing new products, services, or processes; or modifying old ones, then you may be able to make a claim.

R&D tax credits growth and investment virtuous circle

Am I eligible to claim R&D tax credits?

R&D tax credits are available to limited companies in the UK who undertake research and development projects.

What counts as an R&D project is often debated amongst R&D claims advisors. At EmpowerRD we apply the following three criteria to get an initial indication of whether a project could qualify as R&D or not.

High degree of uncertainty

CRITERIA 1Overcoming uncertainty

If the outcome of the project was a foregone conclusion, it probably won’t qualify as R&D. The project should aim to overcome some form of scientific or technological uncertainty.

Driving competitive innovation

CRITERIA 2Advance in its field

The R&D project should aim towards a genuine innovation that hasn’t been seen elsewhere. The new or modified product, service or process should be an advance in its field.

Requires experienced professionals

CRITERIA 3Requiring competent professionals

The R&D should be carried out by competent professionals as that indicates that the advance was challenging to achieve. An example of a competent professional could be an engineer, scientist or skilled craftsman.

While these criteria are an indication of eligibility there are other factors that will affect HMRC’s view. For more information about eligibility, read our eligibility guide or get in touch with one of our team.

Which costs qualify for R&D tax credits?

While you may have undertaken activities that qualify as R&D, you’ll still need to know which costs can be claimed for.

Identifying R&D costs can be difficult, but the main ones you’ll likely claim for are:

Staff

Staff

The wages and some other staff costs associated with the employees undertaking R&D.

Subcontractors

Subcontractors

Subcontractors and consultants are often involved with R&D. You can claim back part of their cost.

Consumables

Consumables

Items that are used up by the R&D process like chemicals, building materials, heat, light and power.

EmpowerRD recommends

There are many more types of R&D costs that you can claim for. We recommend reading our qualifying costs guide before identifying your own costs.

When we reviewed a past claim for one of our clients we were able to identify three times more qualifying costs than their previous advisor had done. That example goes to show how difficult and complex the process of identifying costs is. Even traditional advisors make mistakes and undervalue a claim.

Get in touch to find out more

Speak with one of our R&D claims advisors

How much R&D tax credit can I claim?

The schemes return a % of the amount that your business has spent on R&D in its past financial year. The % that you can claim will largely depend on your company size and financial position.

Company Size

If you’re a company with fewer than 500 staff, and a turnover of under €100m or a balance sheet total under €86m, then you can likely claim through the SME scheme. If your company exceeds those limits then you should claim using the RDEC scheme. Read more about the differences in the schemes here.

Financial Positions

The amount of credit your receive through the SME scheme depends on your profitability. With the RDEC scheme, your profitability doesn’t affect the credit you’ll receive.

SME Scheme RDEC Scheme
A loss-making SME Up to 33% 13%
A profit-making SME Up to 25% 13%
An SME breaking even Up to 18% 13%
A large company N/A 13%

Exceptions

If your SME has received grant funding then it may mean you need to claim through the RDEC scheme. Although this depends on the nature of the grant. Read our in-depth guide to grant funding and R&D claims to find out more.

Claim Amount

In 2019-20 the average UK SME claim was £57,228 and RDEC claim was £332,160. Each year the average value of claims tend to increase.

How to make an R&D tax credit claim

There are four ways to make a claim for R&D tax credits. Here we outline the costs and benefits of each.

Self-file

Methodology
Build and submit the claim yourself

Expertise
Requires R&D credit expertise in your business

Typical claim duration
Varies

Price
Varies

Suitable for claims
Up to £50k costs

Accountant

Methodology
Typically a pre-built template or questionnaire

Expertise
Low level of expertise

Typical claim duration
2-3 months

Price
Varies

Suitable for claims
Up to £50k costs

Traditional Advisor

Methodology
Phone interviews and email chains. Or an in-person business visit.

Expertise
Mixed levels of expertise

Typical claim duration
1-2 months

Price
10-33%

Suitable for claims
Varies

EmpowerRD

Methodology
Advisors available over phone, email and live chat. Online data collection 24/7.

Expertise
Ex-HMRC inspectors and senior R&D claims assessors

Typical claim duration
1-2 weeks

Price
5% or less

Suitable for claims
Over £50k costs

EmpowerRD recommends

We recommend using an accountant or self-filing if you’ve spent less than £50k on research & development in the past financial year. The government publishes a short guide for small companies to self-file here.

If you’ve spent more than £50k we recommend speaking with one of our advisors about your claim process. At that level and beyond, identifying your costs will become more complex, and HMRC will begin to apply more scrutiny to your claim.

It’s also worth noting that if this is your first time making a claim for research and development tax relief then you can claim for your last two accounting periods.

How long does it take to receive the funds?

HMRC commit to a payout SLA of 28 days for both SME and RDEC claims.

However, our 2019 data showed an average payout wait of 47 days for our clients. In some cases, we saw payouts taking up to 4 months before being received. We publish the most up-to-date payout estimates on our HMRC payouts status page.

Time taken to receive SME claim payout
Time taken to receive SME claim payout
If you want to avoid the uncertainty of when you will receive your funds from HMRC then we recommend choosing EmpowerRD Now. EmpowerRD Now will deliver your funds as soon as your claim is submitted to HMRC.

The benefits of R&D tax credits

We have seen businesses transformed by the research and development expenditure credit they receive. It often provides an essential stepping stone to promote further growth, investment and profitability.

The most recent study by the government indicates that for every £1 spent on the R&D tax credit claims, an additional £2 of R&D expenditure is generated in the economy. So the tax incentive continues to be a successful driver of UK competitiveness.

If you have any further questions about the scheme then be sure to check our FAQ here. Or get in touch with one of our advisors.

About EmpowerRD

We’ve radically improved the process of making an R&D tax credit claim.

At EmpowerRD we employ industry-leading R&D claims advisors and ex-HMRC inspectors to assess your claim and help you identify your costs, while also providing an intelligent online platform to help you to co-ordinate the claim amongst your team. Read about the benefits of using EmpowerRD in our case studies.

If you’re an SME and claiming back on more than £50k of costs, or you’re applying through the RDEC scheme, then it makes sense to use EmpowerRD for your claim.

Get in touch to find out more

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Did you know you can access your R&D tax credit up to 9 months early?

Join our webinar and learn about the benefits of R&D advance funding for growing businesses.