How to Claim Tax Relief for Your Research and Development Activities

If you are a business owner engaged in research and development (R&D) endeavors, you may qualify for government-sponsored tax relief. R&D tax relief is a program designed to enable you to deduct a portion of your R&D expenses from your taxable income or claim a tax credit if your business is operating at a loss. This initiative can effectively reduce your tax obligations, bolster your cash flow, and allocate more resources towards your innovation efforts.

But how can you go about securing R&D tax relief? What are the eligibility criteria and associated benefits? How should you document and report your R&D initiatives? we will address these inquiries comprehensively and offer valuable insights and resources to assist you in successfully pursuing R&D tax relief for your business

What is R&D Tax Relief?

R&D tax relief is a government incentive that supports businesses that are engaged in R&D activities. It aims to encourage innovation and competitiveness in the UK economy by rewarding businesses that invest in developing new or improved products, processes, or services.

There are two main types of R&D tax relief: the Small and Medium-sized Enterprise (SME) scheme and the Research and Development Expenditure Credit (RDEC) scheme. The SME scheme is for businesses that have less than 500 employees, a turnover of less than €100 million, or a balance sheet total of less than €86 million. The RDEC scheme is for businesses that do not qualify for the SME scheme, or that receive grants or subsidies for their R&D projects.

The SME scheme allows you to deduct an extra 130% of your qualifying R&D costs from your taxable income, on top of the normal 100% deduction. This means that for every £100 of R&D costs, you can reduce your taxable income by £230. If you are loss-making, you can also choose to surrender your losses for a payable tax credit of up to 14.5% of the surrenderable amount.

The RDEC scheme allows you to claim a taxable credit of 13% of your qualifying R&D costs. This credit is deducted from your corporation tax liability, or paid as a cash payment if you have no tax liability. The credit is subject to corporation tax at the normal rate, so the net benefit is around 11% of your R&D costs.

What are the Eligibility Criteria?

To claim R&D tax relief, you need to meet certain criteria regarding your business, your project, and your costs.

Project Criteria

You need to have an R&D project that meets the following conditions:

  • The project must aim to create an advance in the overall field of science or technology, not just for your business. This means that the project must contribute to the existing knowledge or capability in the field, and not just use or adapt existing solutions.
  • The project must involve a scientific or technological uncertainty, which means that the outcome or the method of achieving it is not readily known or deducible by a competent professional in the field. This means that the project must involve some experimentation, testing, or analysis to overcome the uncertainty.
  • The project must relate to your company’s trade, either an existing one or one that you intend to start based on the results of the R&D. This means that the project must have a commercial purpose and not just be for academic or personal interest.
  • Software costs: The software that is used directly in the R&D activities, such as design software, testing software, or data analysis software.
  • Data costs: The data sets that are used directly in the R&D activities, such as market data, customer data, or scientific data.
  • Cloud services costs: The cloud computing services that are used directly in the R&D activities, such as storage services, processing services, or platform services.

Business Criteria

You need to be a UK-based company that is subject to corporation tax. You also need to be within the scope of either the SME scheme or the RDEC scheme, depending on your size and funding sources.