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.
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.
CRITERION 1 New or improved product
If your business is developing a new or improved product, tool or service, you could be carrying out R&D. It’s also likely that you’ll be attempting to overcome an obstacle where there is no obvious solution. Two examples of qualifying projects could be:
- The development of a new software product.
- Modifying your existing production line to increase productivity.
CRITERION 2 Scientific or technological advance
HMRC states that your specific project must have made an ‘advance in science or technology.’ It sounds impressive and grand, but actually, many projects generate an advance.
For example, if you looked at an off-the-shelf technology and instead built a bespoke application or machine to solve your problem, then that work will likely qualify as an advance.
CRITERION 3 Scientific or technological challenge
To qualify for R&D tax credits, making a scientific or technological advance should be a challenge. That’s why HMRC need to see that your project encountered a ‘scientific or technological uncertainty’ for it to qualify for R&D.
Two factors indicate that you faced a scientific or technological uncertainty:
1. The solution to your challenge was not readily available or within public information.
2. A skilled professional working in your industry cannot easily solve scientific or technological uncertainty.
CRITERION 4 Requiring 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.
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
The wages and some other staff costs associated with the employees undertaking R&D.
Subcontractors
Subcontractors and consultants are often involved with R&D. You can claim back part of their cost.
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.
How much R&D tax credit can I claim?
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 2020-21 the average UK SME claim was £53,663 and RDEC claim was £225,298. Interested in finding out more about HMRC’s latest R&D tax credit statistics? Read here.
How to make an R&D tax credit claim?
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, this was moved to 40 days in June 2022 due to a surge in HMRC identifying fraudulent claims. While HMRC has not given a specific date, they are working to get back to the 28-day mark.
At EmpowerRD, we saw the average payout duration grow considerably over the summer. We uncovered that the delay between submission and payout reached an average of 67 days for claims paid in May and over 75 days for claims paid in June. This is improving, with 40 days being the average for Autumn 2022.
We also publish the most up-to-date payout estimates on our HMRC payouts status page.
If you want to avoid the uncertainty of not knowing when your money will arrive from HMRC, or if you need funds right away, we recommend choosing R&D advance funding.
With R&D advance funding you can receive up to 80% of your R&D tax relief up to 9 months before you file your claim, helping you plan your cash flow accordingly and reinvest the funds back into your business sooner.
To learn more about how R&D advance funding works, read our guide on R&D advance funding.
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.