Introduction to R&D tax credits

Everything you need to know about the R&D tax credit scheme from HMRC.
A complete guide for new claimants.

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 27% of the cost of their research and development.

The scheme can be hugely beneficial to companies by helping them reduce their tax bill, while loss-making companies can receive it as a cash payment. This reduction in corporation tax liability can potentially lead to significant savings.

The R&D tax relief 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 for tax relief.

Am I eligible to claim R&D tax credits?

R&D tax credits are available to limited companies in the UK that 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 four 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, or 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

HMRC need to see that your project encountered ‘scientific or technological uncertainties’ 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.

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

Which costs can you claim R&D tax credits for?

While you may have undertaken activities that qualify as R&D, you’ll still need to know which costs can be claimed for. These costs must meet specific criteria for tax purposes and be properly documented in the company’s accounts. Recently, there has been an increase in HMRC enquiries concerning tax relief claims, highlighting the importance of providing evidence to support these claims.

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.

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 exact % that you can claim will largely depend on two factors:

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.

*Please note that the % of R&D tax credits you can claim has recently changed for accounting periods beginning on or after April 2023.

SME scheme

For accounting periods starting on or after April 2023, the enhancement rate for the SME scheme is 86% and the tax credit rate is 10%. What does this mean in terms of the relief you get back?

Company’s financial position:

Breaking Even: Eligible for 8.6% relief.
Loss-Making: Eligible for 18.6% relief.
Profitable: Eligible for 21.5% relief.

ERIS scheme

There was also a new category for SMEs; these are called R&D-intensive SMEs. They can claim through the ERIS scheme.

Defined as companies with at least 40% (30% from 1 April 2024) of total expenditure on qualifying R&D.
Eligible for a higher payable R&D tax credit rate of 14.5%, receiving a cash credit of £27 for every £100 of R&D expenditure.

RDEC scheme:

The RDEC rate is 20%.
Calculation Example: For £1,000,000 of Total Qualifying R&D Expenditure, the gross credit amount would be £200,000, with a net claim value of £150,000 after accounting for the new corporation tax rate. Essentially, a 15% RDEC benefit.

For more details on how much R&D tax relief you can claim for your business, consult our dedicated guide on how much you can claim or to find out exactly how much you can claim, consult our R&D tax relief calculator.

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.

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.

Not just this, but the way you claim has also changed recently with the introduction of the additional information form in August 2023. This is a more detailed and complex way of claiming than most will be used to. In addition to this, first-time claimers now have to submit a claim notification form prior to submission to ensure their claim is valid.

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.

If making a tax relief claim with EmpowerRD, the process will follow these 6 simple steps:

Onboarding call
Fill out the claim form
Professional review
Form submission
HMRC follow-up
Receive tax credits

For more details, read our page on the six-step claims process.

How long does it take to receive the funds?

HMRC used to commit to a payout SLA of 28 days for both SME and RDEC claims. However, this was changed to 40 days in June 2022 due to an increase in the number of fraudulent claims identified by HMRC. But while HMRC has not given a specific date, they are working to get back to the 28-day mark. For more information, read our guide on how long it takes to receive R&D tax credits.

We also publish the most up-to-date payout estimates on our HMRC payouts status page.

R&D Advance Funding

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.