R&D Tax Reliefs Explained
Supporting businesses that are taking commercial risks to advance industry knowledge, products, processes and services.
What Are R&D Tax Reliefs?
£7.5 Billion
R&D relief awarded to UK businesses in 2022-23
R&D tax reliefs are a UK government incentive aimed to support innovation within limited companies.
It enables businesses to deduct up to an additional 86% off a qualifying R&D projects spend. (Please note, for accounting periods starting on or after 1st April 2024 a new merged R&D tax relief scheme will come into effect and offer an additional tax credit gross benefit of 20% (R&D intensive loss-making SMEs, might qualify for Enhanced Research and Development Intensive Support (ERIS) and could receive a enhanced payable credit rate of 14.5% ))
However, to qualify, the innovative project must attempt to overcome a scientific or technological uncertainty within a particular field.
How Do R&D Tax Reliefs Work?
To qualify, an R&D project must attempt to overcome “scientific or technological uncertainties”.
Simply put, this is when a business sees a gap within the market and they decide to commit financially and with the time of a qualified professional to embark on a process of investigative testing, all in the hopes of solving an unknown solution.
This testing phase is what qualifies; therefore, a failed or successful solution can still claim, as long as it extends the knowledge within their field.
The R&D Project Must Be Attempting To:
Check Your Eligibility for R&D Tax Reliefs
To qualify for the R&D support, a business must fulfil the following criteria:
- Incorporated company.
- Attempted to create a new or enhance an existing product, service or process.
- Attempted to advance the field’s overall knowledge with the qualifying project.
- A qualified, competent professional could not have readily solved the uncertainty at the outset of the project.
- Committed financial resources to complete an innovation project that involved research, testing and analysis.
Qualifying Research and Development Activities
R&D tax reliefs support innovation projects from the start to the end of the scientific and technological uncertainty. Below is an example of where, in a product’s life-cycle, qualifying R&D activity can occur.
Non-Qualifying
Commercial/Scientific Idea
Market/Feasibility Research
Qualifying R&D
Establishing technological or scientific uncertainty
The process of resolving the technological or scientific uncertainty
Prototyping
Non-Qualifying
Patents or other IP protection sought
Pre-production design
Industrial upscaling
Qualifying R&D
Establishing technological or scientific uncertainty
The process of resolving the technological or scientific uncertainty
Prototyping
5 Qualifying R&D Tax Relief Costs
There are five pillars of qualifying R&D costs you can claim for within the “uncertainty” phase of an innovation project.
Staff & EPW Costs
Under the R&D tax relief incentive, you can claim the following costs for staff or externally paid workers (EPWs) who were directly involved in an R&D project (they had “hands on” input), and some managerial time:
Salaries
Wages
NICs contributions
Pension contributions
Software, Data & Cloud Computing Costs
Software expenditure that was directly involved in the R&D project. You can also claim for a proportion of software that was only partly used in innovation activities.
For financial years beginning on or after 1st April 2023, you will be able to claim for Data & Cloud Computing Costs directly involved with the R&D project that fall into the following categories:
Data storage
Hardware facilities
Operating systems
Software platforms
Purchase costs of data sets
Consumable Costs
Materials and hardware that are directly consumed during the R&D project.
This includes chemicals, ingredients and electrical components.
These materials and their outputs must not be commercially viable.
Utility Costs
Power, water and fuel that are directly used in an R&D project.
Calculating the proportion of utility costs used in an R&D project can be difficult, but the Amplifi team can advise you on the best practices.
Subcontractor Costs & Overseas Restrictions
SME Scheme – you can claim for 65% of unconnected subcontractors and freelancer costs under the SME scheme. The rules are more complex for connected subcontractors.
RDEC scheme – restricted to R&D project payments made to individuals, a partnership of individuals or a qualifying organisation.
Merged scheme and ERIS – Whoever decided to undertake the R&D can claim. You can claim 65% of an R&D payment made to an unconnected contractor, or up to 100% for a connected contractor.
Overseas Restrictions – From accounting periods beginning on or after 1st April 2024, all claimants’ (expect NI registered companies claiming ERIS) contracted R&D activities must now be undertaken in the UK, plus the company or staff controller of any R&D related EPWs is required to apply PAYE and NICs for that worker.
Guide To The R&D Tax Relief Schemes
Any incorporated business in any sector is eligible. As long as they are trying to “resolve scientific or technological uncertainties”. Please note that for accounting periods commencing 1 April 2024 a new merged R&D tax credit scheme will come into effect.
SME R&D Tax Reliefs
The SME scheme is for qualifying R&D activity in small and medium-sized businesses.
For expenditure made on or before 31st March 2023, it offers an additional tax deduction of up to 130%.
For expenditure made from 1st April 2023, it offers an additional tax deduction of up to 86%.
Large Business R&D Tax Relief (RDEC)
The RDEC scheme is for qualifying R&D activity in large enterprises
For expenditure made on or before 31st March 2023, it offers an additional tax credit gross benefit of 13%.
For expenditure made from 1st April 2023, it offers an additional tax credit gross benefit of 20%.
Migrating from the SME & RDEC scheme to the Merged scheme and Enhanced R&D Intensive Rate
Merged Scheme
This single scheme replaces the previous SME and RDEC schemes and provides an additional tax credit gross benefit of 20%.
The merged scheme applies to R&D expenditure incurred in accounting periods commencing on or after 1st April 2024.
Enhanced R&D Intensive Support (ERIS)
The Enhanced R&D Intensive Support (ERIS) is an enhanced payable credit rate of 14.5% is available for eligible R&D intensive loss-making SMEs that fall into the below criteria:
- Loss-making SMEs who spend 40% or more of their total expenditure on R&D in accounting periods beginning on or after 1st April 2023.
- Loss-making SMEs who spend 30% or more of their total expenditure on R&D in accounting periods beginning on or after 1st April 2024.
R&D Tax Relief Rates Explained
