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R&D Tax Credits

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From 1 August 2008:

SME R&D tax credits scheme

•        the rate of relief increases from 150% of qualifying expenditure to 175% of qualifying expenditure;

•        the scheme is extended to companies with more than 250 but less than 500 employees.

From 1 April 2008:

Large company scheme

•       the rate of relief increased from 125% of qualifying expenditure to 130% of qualifying expenditure.

About R&D tax credits

Research and development (R&D) helps companies improve profits and grow by creating new high value-added products, processes and services.

R&D tax credits are at the heart of the Government's strategy to raise levels of business investment in R&D and encourage business innovation by providing a tax incentive.

The relief was developed through consultation with business and is available to companies throughout the UK and across industry sectors.  To be able to claim relief a company must be undertaking qualifying R&D.  This includes 'brown collar' R&D as well as the more obvious 'white collar' R&D.

The incentive provides an extra tax deduction based on R&D spending.  For certain loss making small or medium sized companies (SMEs) it may be possible for them to surrender their losses in return for a cash payment from HMRC.

Biggest single funding mechanism

R&D Tax Credits are the biggest single funding mechanism for business R&D provided by Government. 

Are you missing out? - see our case studies

Companies may miss out on this incentive because they do not appreciate that they are performing R&D for which they can claim - or that the claiming process is straightforward.  For a brief overview of what’s involved in claiming see our leaflet "R&D Tax Credits: What's in it for you?" and also our case studies.  The case studies give practical examples from different industrial sectors of the wide range of companies that have claimed and include advice about preparing the first claim.  BCC, CBI, Design Council, EEF and Business Link have endorsed both the leaflet and case studies. See:

R&D Tax Credits: What's in it for you? and Applying for R&D Tax Credits: Case Studies of Companies' Experiences

Claims time limit

The time limit for making R&D claims was reduced for accounting period ending on or after 31 March 2006 from six to two years after the end of relevant accounting period.

Improved Processing of claims

Since November 2006 most claims have been processed by HMRC R&D specialist units.  The units were introduced to help ensure greater consistency in dealing with claims and more certainty for companies making claims.  The units handle claims from small and medium enterprises under Schedule 20, Finance Act 2000 and from large companies under Schedule 12, Finance Act 2002 and claims for vaccine research relief under Schedule 13 Finance Act 2002.  For further information and to identify your local unit see HMRC note on specialist units

Am I doing R&D?

The guidelines on the meaning of R&D for tax purposes  issued by the Secretary of State for Trade and Industry in 2004 set out the full definition of R&D for tax purposes.

A basic definition is "work to resolve scientific or technological uncertainty aimed at achieving an advance in science or technology".  Advances include new or improved products, processes and services.

Broader innovation in products, processes and services (e.g. proprietary content, non-technical design or developing other non-technological unique selling points) isn't R&D.

If it's obvious to a professional how to do something, doing it isn't R&D.  If there is a 'non-obvious' scientific or technological problem around how to do something, then doing it is probably R&D.

As a rule of thumb, developing information or other 'content' is not R&D, but developing the means to deliver 'content' can be R&D.

Can I benefit from R&D tax credits?

All companies spending at least £10,000 a year on qualifying R&D are entitled to a deduction when calculating their taxable profits of

• 150% of qualifying expenditure for SMEs (increasing to 175% in respect of expenditure incurred on or after 1 August 2008) or
• 125% of qualifying expenditure for larger companies until 31 March 2008 and 130% in respect of expenditure incurred on or after 1 April 2008

reducing the company's UK corporation tax bill accordingly.

A number of changes have been made which will affect the SME R&D scheme and the Vaccine Research Relief (VRR) schemes with effect from 1 August 2008.

• companies whose most recent accounts are not produced on a going concern basis will be unable to claim relief.
• A cap will be introduced to restrict the amount of relief under these schemes to €7.5 million per R&D project.
• Large companies will have to make a declaration concerning the incentive effect of relief they are claiming under the VRR scheme.
• The special subcontracting rules for charities, universities and scientific research organisations under the VRR scheme will be removed.  Subcontracting to any of these bodies will be put on the same basis as any other subcontracting arrangement.
• Companies will no longer be able to claim relief under the VRR scheme in respect of contributions they make to independent research carried out by charities, universities and scientific research organisations. 

For further information seen http://www.hmrc.gov.uk/research/vrr-tax-relief-rules.htm.

The value of the payable credit for SMEs not in profit remains at about 24% of qualifying expenditure.

Costs that can be claimed

Companies can claim R&D Tax Credits for their revenue expenditure on:

• employing staff directly and actively engaged in carrying out R&D,
• paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D,
• consumable or transformable materials used directly in carrying out R&D (broadly, physical materials which are consumed in the R&D), and
• power, water, fuel and computer software used directly in carrying out R&D.

Capital expenditure is not eligible - this may be covered by 100% capital allowances (Research & Development Allowances) instead.

Am I eligible?

If you spend at least £10,000 in the accounting period on qualifying R&D you should consider putting in a claim.

To claim under the SME scheme for work undertaken before 1 August 2008 you must have fewer than 250 employees with either an annual turnover not exceeding €50m or a balance sheet totalling €43m, and not be part of a larger Enterprise that would fail these tests.  Other companies should apply for the large company scheme.

For work undertaken on/after 1 August 2008 the SME scheme is being extended to companies with fewer than 500 employees which have an annual turnover not exceeding €100m and/or with an annual balance sheet total not exceeding €86m.

SMEs not in profit can get a cash payment equivalent to about 24p per £1 of qualifying expenditure instead of tax relief - thus getting money to support R&D while the company is loss-making.

Special rules

Unlike the large company scheme the SME R&D tax credits scheme is a 'notified State Aid' and there are limits on the total amount of aid that can be given for projects.  A company cannot therefore receive the SME R&D tax credit if it gets another notified state aids for the same project. Examples of notified State Aid include collaborative grant funding under the Technology Programme and Grant for R&D.

Where the rules prevent tax credits being claimed under the SME scheme, in certain limited circumstances a claim may be made under the large company scheme instead.  For a detailed explanation see HMRC CIRD manual - 81670.  Each notified state aid has a specific number which can be traced via the attached link using the 'Edit', 'Find on this Page' facility  http://ec.europa.eu/comm/competition/state_aid/register/ii/by_ms_gbr.html.

EU Framework Programme

R&D tax credits can be claimed for work in projects funded by the Framework Programme for Research & Technological Development (FP), the EU's main instrument for funding research in Europe.

The FP is NOT notified State aid.  This means that SMEs will be able to make claims to relief under the SME R&D scheme. They will be able to claim R&D tax relief, including the payable tax credit if appropriate, under the SME R&D scheme in respect of qualifying expenditure not covering by the FP funding.  They will also be able to claim under the large company scheme, but at the lower tax relief rate of that scheme, in respect of the qualifying expenditure covered by FP funding.  In the tabular example below the SME can claim tax relief totalling £392,500 against qualifying R&D expenditure of £250,000.

Example of what R&D tax credit a SME can claim in a FP-funded project:-

Large companies can claim under the large company scheme for all qualifying R&D expenditure projects including for the FP grant-funded element.

For a one stop shop for information and advice about the current FP contact FP7 UK

Help for SMEs

A new guide to R&D tax credits for SME companies and their advisers is now available. Developed by DIUS (formerly DTI) and HM Revenue & Customs with input from small companies, the guide includes information on how the R&D tax credits scheme works, what can be claimed and how to claim.  It highlights some common errors to avoid and provides a number of tools to make claiming easier.  You can also use a new interactive tool developed by Business Link in partnership with HM Revenue and Customs and DIUS, which helps a company to find out whether it may be eligible for the R&D Tax Credit by answering a simple series of questions, which takes five minutes.

Differences between the SME and large company schemes

SME scheme

• 150% rate of enhanced deduction, increasing to 175% for expenditure incurred on or after 1 August 2008
• Payable credit equivalent to about £24 for every £100 of qualifying expenditure on R&D
• Company can claim for expenditure on R&D it sub-contracts to others
• Company cannot claim for contributions to independent research
• Claim can be reduced if the R&D project is subsidised or a grant is received in respect of it
• Company must own the intellectual property arising out of the R&D

Large company scheme

• 125% rate of enhanced deduction, increasing to 130% for expenditure incurred on or after 1 April 2008
• No payable credit
• Company can claim for contributions to independent research carried out by charities, universities and scientific research organisations
• Company can only claim for expenditure on R&D it carries out itself, unless it sub-contracts R&D to universities, charities or public sector research establishments
• No reduction for grant or subsidy
• Company need not own the intellectual property arising out of the R&D

How do I claim R&D tax credits?

A company claims R&D tax credits with its company tax return (Form CT600).

Where can I get help and further information?

It can be a good idea to discuss a possible claim - particularly a first claim - in advance with your tax inspector.  This can save wasted effort for you and for them!

Professional advisers such as your accountant can also help you make a claim, for a fee.

Trade associations and professional networks may help put you in touch with other companies with experience of claiming R&D tax credits.

Detailed information about R&D tax credits, which can help you understand what and how to claim, is available via the HM Revenue & Customs' website.  Full details of the R&D tax credits legislation, including how to claim, are provided in the HM Revenue & Customs' Corporate Intangibles Research and Development (CIRD) manual.

Other R&D and innovation support

If you are involved in R&D you may be able to claim 100% capital allowances for your R&D capital spending.

The Business Link Grants and Support Directory provides tailored business support solutions designed to meet different stages of business's development and growth, including grants, for innovation and science.

The Technology Strategy Board (TSB) has a remit to stimulate business innovation in areas offering greatest scope for boosting UK growth and productivity. TSB promote and support research into, and the development and exploitation of science, technology and new ideas for the benefit of business, in order to increase economic growth and improve the quality of life in the UK.

TSB delivers a programme of Government financial support through appropriate mechanisms, including Collaborative R&D, Knowledge Transfer Networks and Knowledge Transfer Partnerships, to encourage business investment in, and use of, technology across all sectors of the UK economy.

The Small Business Research Initiative (SBRI) is an initiative designed to help SMEs gain greater access to publicly funded Research and Development (R&D) contracts.  Supplier route to Government is a new service designed specifically to give companies easy access to lower-value contract opportunities (typically worth under £100,000) offered by the public sector.

The R&D Scoreboard evidences the benefits to companies of R&D investment, and reports the performance of the top UK and global companies investing in R&D.