Research & Development tax credits

Qualifying R&D expenditure.

In order to qualify for the generous R&D tax reliefs, all projects or start ups must be looking to advance science and technology. There must also be an element of uncertainty which could not have been easily overcome by a competent professional in the relevant field. The R&D project may research or develop a new process, product or service or improve on an existing one. HMRC’s guidance specifically says that the project must represent an advance in the overall field, rather than simply applying existing technology to a new sector.

Tax rules set out clear categories of costs which are qualifying expenditure for the purposes of R&D, and it is only these costs that can be included in the claim.

The categories are:

  • staff costs
  • subcontractor costs
  • consumable items: materials and utilities that are “consumed” by the R&D process, i.e. water and electricity, but not data
  • software
  • expenditure on externally provided workers, typically agency staff. Only 65% of subcontractor costs and expenditure on externally provided workers would normally qualify.
  • contributions to independent research
  • expenditure on clinical trial volunteers
  • Usually capitalised costs are not allowable, however in certain circumstances some capitalised intangible costs are tax allowable for R&D purposes. The tax legislation specifically permits a full deduction to be claimed in the year of expenditure for R&D costs which are capitalised as an intangible asset. As well as intangible assets. Costs of buildings in which the R&D is carried out and the equipment used to conduct the R&D activity all qualify.  The expenditure for example, may be for laboratories, research facilities, offices, research equipment, information technology and even cars. It is important to note that when capital expenditure is incurred on a property for research and development purposes, only the building itself potentially qualifies and not the land.

HMRC emphasise the importance of every business to be able to back up the R&D figures with supporting information such as developers’ timesheets. Thorough records of the work carried out will be crucial in identifying the costs that can be included in your R&D claim. They will also be helpful in the event of an HMRC enquiry into your claim.

Available tax reliefs

You can claim R&D relief under two schemes. Small and medium sized enterprises (SME) R&D Relief and R&D expenditure credit (RDEC). Although the types of costs which can be included are generally the same, the calculation is very different under each of the schemes.

The relevant scheme depends on the size of the company making the claim and whether the work is being carried out on behalf of another company or is being funded by grants.

The size limits for the small and medium sized enterprises (SME) scheme are:

  • less than 500 employees
  • and an annual turnover not exceeding €100 million
  • or gross assets on the balance sheet total not exceeding €86 million

The SME scheme gives an additional 130% tax deduction. Together with the expense already in the profit and loss (P&L), this results in a deduction of 230%. If your company has a taxable loss, you can claim a tax credit of 14.5% of the uplifted R&D expenditure.

If your company is unable to claim under the SME scheme, the Research and Development Expenditure Credit (RDEC) is available. It gives a tax credit of 12% of your qualifying expenditure. This refund is itself taxable.

You can make a claim up to 2 years after the end of the accounting period it relates to.

See also Grant funding and R&D tax credits.

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