R&D Tax Credits Explained

Research and Development (R&D) tax credits help grow innovative UK startups and businesses. 

What are R&D Tax Credits?

R&D Tax Credits are a government tax incentive that rewards UK-based businesses that have invested in innovation. R&D Tax Credits can be paid to you as cash or reduce your business tax bill to increase growth of your SME business or RDEC eligible company.

How do R&D Tax Credits work?

  • Startups and businesses that spend money to develop products or services (or even enhance existing ones) can be eligible for R&D tax relief.  
  • The money spent towards innovation can be claimed back from HMRC through a R&D Tax Credit claim.
  • The R&D Tax Credit claim can be received in the form of a cash payment or a Corporation Tax reduction.
  • R&D tax credits can also help newer companies claim up to two years of past R&D expenditure back if the startup or business has not yet claimed R&D Tax Credits.

Who is eligible to claim R&D Tax Credits?

Startups and businesses that are registered in the UK and are subject to a Corporation Tax can be eligible for R&D tax credits when:

  • The money is spent on research and development activities for growth and innovation
  • The research and development activities qualify under the UK government's criteria for R&D
F6S can help with your R&D claim

Who qualifies for R&D tax credits?

Startups and businesses from any sector can qualify for R&D Tax Credits as long as the business performs and pays for qualifying research and development costs.

Whilst many R&D Tax Credit recipients are weighted towards technology development and research, a business in any area can still be eligible to claim R&D Tax Credits for eligible costs. As examples, a business can be making knitted sweaters using innovative materials or could be delivering IT services using innovative technologies.

The market sector is not the key element - the innovative activity is the important factor to qualify for R&D tax relief eligibility.

Top Qualifying Sectors for R&D Tax Credits

What costs qualify as R&D?

If your R&D project qualifies, you can submit an R&D tax relief claim based on the following qualifying R&D expenditure:

Employee cost (Qualifying Costs for R&D Tax Credits)

Employee cost

The cost of employees who are directly involved in research and development activities can qualify as R&D. The claim for a portion of director or employee time that is actively spent on R&D activities can qualify for R&D too. All directors and employees should be directly employed by the company under a contract of employment and paid through the payroll.

Externally provided workers (Qualifying Costs for R&D Tax Credits)

Externally provided workers

The cost of paying a 'staffing solution service' helped supply external workers/staff directly engaged in research and development activities.

Materials (Qualifying Costs for R&D Tax Credits)

Materials

The cost spent on actual physical materials or hardware that are consumed in activities directly related to R&D.

Trials & Volunteers payments (Qualifying Costs for R&D Tax Credits)

Trials volunteers payments

The cost of sourcing volunteers to take part in clinical trials that are needed for the R&D activities.

Utilities (Qualifying Costs for R&D Tax Credits)

Utilities

The cost of water, power and fuel, utilised directly for carrying out R&D.

Software (Qualifying Costs for R&D Tax Credits)

Software

The cost of the software you buy that is directly employed in your R&D activities.

Subcontractors (Qualifying Costs for R&D Tax Credits)

Subcontractors

SMEs can qualify between 65% or 0%-100% of the spend on R&D activities done by subcontractors.

Capital Expenditure (Qualifying Costs for R&D Tax Credits)

Capital expenditure

The expenditure on capital assets. You can claim expenditure of R&D as a capital allowance in some cases.

You can read about some types of costs that don’t qualify for R&D Tax Credits.

What are the two R&D Tax Credit schemes?

SME Scheme (R&D Tax Credits)RDEC Scheme (R&D Tax Credits)

At a high level there is an R&D Tax Credit scheme for SMEs that pays companies more and the RDEC scheme for larger companies that pay companies a lower rate. There are cases where an SME would want to claim under the less generous RDEC scheme. Here’s more detail on the SME and RDEC schemes:

1. SME R&D Tax Credit scheme

The R&D tax credit scheme for small and medium-sized businesses (SMEs) is commonly referred to as the SME scheme. This scheme is a UK government tax incentive that encourages innovation among small and medium-sized businesses in the UK. Here’s a general guide to how the SME scheme works:

  • Your company or group must have fewer than 500 employees, and a turnover of less than €100 million or a balance sheet total under €86m..
  • You could receive £33 in cash for every £100 spent on R&D, even if you are a loss making company.
  • If you make a profit, your R&D costs are increased by 130 percent, resulting in a tax relief of £24.70 for every £100 spent on R&D.

You can read our article on why R&D tax credits are so beneficial for SMEs to fully understand the benefits of the scheme for SMEs.

2. RDEC R&D Tax Credit scheme

RDEC (Research and Development Expenditure Credit) is a tax credit offered by the UK government to encourage larger innovative businesses to engage in R&D. As mentioned before, there are cases where an SME may also claim under the RDEC scheme for some or all of their expenditures, particularly when the SME receives grant funding from a public entity. Here’s a general guide to how the RDEC scheme works:

  • Your company or group must have more than 500 employees or a turnover of more than €100 million or a balance sheet total over €86m.
  • The RDEC scheme does not have any upper or lower limit on R&D spending.
  • Businesses can still access the 30% uplift for previous tax years.
  • The RDEC tax credit is worth 13% of your eligible R&D expenditure.
  • In other words, you get 11p for every £1 you spend on qualifying R&D because the credit is taxable at the standard Corporation Tax rate of 19%.

Correct accounting for costs that can be claimed as R&D tax credits is crucial under the RDEC scheme.

What R&D tax credit incentive is right for my business?

Claiming R&D tax credits as a SME or Startups

Small or medium businesses can claim up to 33% of their research and development expenditure in cash. The percentage that is claimed back can vary and depends upon several factors. Here are some scenarios that will affect a claim:

  • Up to 33% repayment for loss-making companies
  • Up to 26% repayment for profit-making companies
  • Up to 18% repayment for companies breaking even

An SME with a grant may still be entitled to claim R&D tax credits if they have received a grant that is considered State Aid (i.e. grants, subsidies, etc., from public bodies such as Innovate UK). In this case, the SME can claim under the Large Company Scheme/RDEC and get back up to 11%. However, if the grant is not considered State Aid, they will claim partly under the Large Company Scheme/RDEC and partly under the SME scheme.

How SMEs claim R&D tax credits? 

You are a SME/startup that makes a profit
For example, if you made a profit of £600,000 in your last financial year and spent £350,000 on eligible research and development activities, you can get up to £26,000 back.
Your profit
£300,000
Your Corporation Tax (20%)
£300,000 x 20% = £60,000
Your eligible R&D spend
£100,000
R&D enhancement
£100,000 × 130% = £130,000
Amended taxable profit
£300,000 - £130,000 = £170,000
Amended Corporation Tax (20%)
£170,000 × 20% = £34,000
You can get back
up to £26,000
You are a SME startup that makes a loss
For example, if you're making a loss of £600,000 and spending £350,000 in eligible R&D activities, you can get up to £33,350 back.
Your trading loss
£300,000
Your eligible R&D spend
£100,000
R&D enhancement
£100,000
Enhanced trading loss
£100,000 × 130% = £130,000
Repayable tax credit
£300,000 + £130,000 = £430,000
Amended Corporation Tax (20%)
£230,000 × 14.5% = £33,350
You can get back
up to £33,350
You are a SME startup that has won a grant
As an example, if you receive a grant for £80,000 and spend £100,000 in eligible R&D activities, you can claim tax relief using the SME scheme for £20,000 and the RDEC for £80,000.
Amount of grant received
£80,000
Your eligible R&D spend
£100,000
Amount eligible for SME
£100,000 - £80,000 = £20,000
Amount eligible for RDEC
£80,000
You are a SME/startup that makes a profit
For example, if you made a profit of £600,000 in your last financial year and spent £350,000 on eligible research and development activities, you can get up to £26,000 back.
Your profit
£300,000
Your Corporation Tax (20%)
£300,000 x 20% = £60,000
Your eligible R&D spend
£100,000
R&D enhancement
£100,000 × 130% = £130,000
Amended taxable profit
£300,000 - £130,000 = £170,000
Amended Corporation Tax (20%)
£170,000 × 20% = £34,000
You can get back
up to £26,000

Claiming R&D tax credits as a large company

Large companies can claim R&D tax credits of up to 11% under the Large Company Scheme or RDEC. Anyone that does not fall into the definition of an SME is considered a large company to calculate how much you get back in R&D tax credits. Trading losses can be surrendered (i.e. not brought forward to reduce future taxable profits) for a tax credit equal to 11% of the surrendered amount.

You are a large company that makes a profit
If you're making a profit of £1,000,000 and spending £500,000 in eligible research and development activities, you can get up to £74,000 back.
Your profit
£1,000,000
Your Corporation Tax (20%)
£1,000,000 x 20% = £200,000
Your eligible R&D spend
£500,000
R&D tax credit (11%)
£500,000 × 11% = £55,000
Your enhanced profit
£1,000,000 + £55,000 = £1,055,000
Corporation Tax (20%)
£1,055,000 × 20% = £211,000
Revised tax payable
£211,000 - £55,000 = £156,000
You can get back
up to £44,000
You are a large company that makes a loss
If you're making a loss of £2,000,000 and spending £2,500,000 in eligible R&D activities, you can get up to £44,000 back
Your trading loss
£300,000
Your eligible R&D spend
£500,000
R&D tax credit (11%)
£500,000 × 11% = £55,000
Loss before tax
£355,000 - £500,000 = -£145,000
Corporation Tax (20%)
£355,000 × 20% = £71,000
R&D tax credit usable against tax
£55,000 - £11,000 = £44,000
You can get back
up to £44,000
Why should you claim R&D tax credits?

How do you claim R&D tax credits?

  • Identify the projects that qualify for R&D tax credits claim
  • Check which scheme your company qualifies for (SME scheme or RDEC)
  • Identify the costs that are eligible as R&D expenditure
  • Use the R&D calculator to calculate the size of your R&D tax credit claim
  • Write a technical narrative describing technological innovation in line with HMRC requirements
  • Fill a CT600 (Company Tax Return) form
  • Send your updated CT600 along with a detailed and HMRC rules compliant technical narrative and detailed calculations as a single document to HMRC.

There are cases when HMRC can reject your application. You can learn more about how to reduce the chance of rejection in our article Why HMRC might reject your R&D tax relief claim.

How do you claim R&D tax credits
F6S can help with your R&D claim

FAQs

How much R&D cash can I get back?

If you are losing money, you can claim back up to 33% of your qualifying development spend in cash as SME R&D tax credit. In other words, you can get up to 33p back for every £1 you spend. If you are profit-making, your relief will offset your tax liability up to the amount of tax you owe. A profit making company, startup or SME can even get cash back if its Research and Development Tax Credit is greater than your corporation tax liability. In that case, you get the amount you're owed in R&D tax relief that is greater than your tax liability back in cash. You can get cash back as well if you've already paid your corporation tax - often the case when we are filing an amended corporation tax return to cover R&D expenditure in the R&D Claim for your past financial years.

What kind of innovations qualify for R&D tax benefit?

You need to create an ‘advancement in science or technology through scientific or technological uncertainty'. Each company, startup and SME is different, but HMRC likes to see technology built from scratch or third party technology that has been adapted so it functions better. This 'advancement' should also be challenging to build. If you've managed to solve your problem with little thought or in a few days it most likely won't qualify. Once you have identified this 'advancement' you can qualify costs from the whole project.

How do I get my R&D money?

We will submit your company's corporation tax return including the tax credit you're looking to receive. We will attach a report to your corporation tax return explaining to HMRC how you are creating your 'advancement in science and technology'. We will also calculate your qualifying R&D expenses, your R&D tax credit value, and build a technical report to show HMRC why you deserve the relief.

Can I claim R&D tax credits if I'm making a loss and don't pay corporation tax?

Yes, you don't need to be paying Corporation tax to claim research and development tax credit. In fact, it's better to be loss-making as you can claim the highest amount (33%) in SME R&D tax credit and receive a repayment in cash. The UK government wants to support innovation and technological growth, which is why they are generous in helping companies purely investing in R&D and not generating any revenue.

I've received a grant, can I still claim R&D tax credits?

Yes, you can still file a R&D Claim if you have received a grant. There are two categories of grants for R&D tax credits: 1) Notified State Aid and 2) De Minimis Aid. If you've received Notified State Aid (e.g. Innovate UK) the entire project will need to be put under the Large Company Scheme. If your project has received De Minimis Aid (this includes university subsidies and EU grants) you can claim the costs funded by the grant under the Large Company Scheme, and you can claim the costs incurred from privately funding through the SME scheme. However, this is a complicated area of HMRC R&D tax Credits and we'd recommend you speak with one of our specialists.

How long does the R&D tax credit process take?

We process your claim promptly after finalizing your documentation. HMRC generally takes four to six weeks to process a claim. We check in regularly with HMRC to ensure that your claim is progressing and to respond quickly to any questions about your HMRC R&D tax credits. We will also prioritise your claim if you have a deadline or other need.

I use foreign subcontractors from outside the United Kingdom, can I claim on those R&D costs too?

Yes, it doesn't matter that you're paying foreign companies or individuals to carry out R&D work. However, it's important that they go through your UK limited company. You want to ensure you have contracts and invoices in place as supporting evidence for the R&D work being conducted as part of your R&D Claim.

What costs can I include in my R&D Claim?

We'll advise you on which costs can be used in calculating R&D tax Credit, which include:

  • Employee salaries: including those directly and indirectly involved in the R&D. This could also include indirect costs such as specialist training and recruitment.
  • Subcontractors: costs for paying a staff provider to source external workers (e.g. UpWork), or are contracting an individual or company.
  • Consumed Materials and Hardware: Materials consumed within the prototyping or testing phase.
  • Software: tools used in order to build the product.
  • Utilities: gas, light, electricity used specifically for the R&D project.
Can you claim R&D tax relief for unsuccessful R&D projects?

Yes, R&D tax credits can be claimed for unsuccessful R&D projects. There is no guarantee of project success when conducting R&D within your company. Independent of whether a project fails, HMRC clearly states that you can still claim tax relief, as long as the project fits the eligible activities criteria.

R&D tax credits are not viewed as a reward for success. Rather, they are intended to be viewed as an incentive to develop projects and encourage businesses to take risks.

Can I make claims for past research and development tax credit?

Yes, you can. We often file R&D Claims for past financial years for our clients. We are successful 100% of the time in getting their money from the UK government.

When is it too late to claim research and development tax credit?

You can only claim HMRC R&D tax credits back two financial periods. For example, you can claim as late as November 2017 for a financial year that ended November 2015. We can advise you on getting a cash refund for past financial periods and past costs, even if you did not claim R&D tax relief when you filed the original corporation tax return.

How many times can I claim R&D tax credits?

You can claim R&D tax credits after each financial period (when you submit a corporation tax return) as long as you are creating a new advancement in science or technology. You have the ability to shorten and lengthen your accounting period, which can give you flexibility for filing a claim.

Can I claim if I've been contracted by another company to do R&D tax credits?

You can claim under the Large Company Scheme/RDEC if the company contracting you is considered a large company. If the company contracting you fits under the definition of an SME then you cannot claim on these costs.

How to claim R&D tax credit?

First, determine if your activity is eligible for R&D tax Credits. At a high level, it can be a technical innovation that requires development and is conducted in an environment of uncertainty. You must also be registered as a UK company for corporate tax. Then, you'll need to develop a written report (called a technical narrative) that describes your technological innovation in line with HMRC requirements. Identifying which of your costs are eligible for money back from the UK government is the next activity. Those costs are then totalled and your R&D Tax Credit is calculated. Finally, submit everything to HMRC and wait for a response. HMRC will either send your money or make a query for additional information or clarifications.

Are R&D tax credits state aid?

If you are a SME that has received a grant you may still be entitled to claim the SME R&D tax credit under the SME Scheme. If you have received a grant that is considered State Aid (i.e. grants, subsidies, etc. from public bodies such as Innovate UK) then you can claim under the Large Company Scheme/RDEC where you get back up to 11%. If the grant is not considered State Aid you will be able to claim partly under the Large Company Scheme/RDEC and partly under the SME R&D tax Credit. Your eligible amount will be how much you spent, less the amount of the grant itself. Many of the companies, startups and SMEs we help receive grants and we can give you a free orientation on how you can claim to receive the most amount back.

Can I claim credits for R&D if my research is subcontracted?

Yes, you can claim in many cases for what you spend on contractors, even if they're outside the United Kingdom. We are even often successful in increasing the amount our clients get by 'connecting' the subcontracts, if possible under HMRC regulations.

How long will it take to get the R&D tax credits?

We work hard to make sure that your R&D tax Credit is approved quickly and without issues. HMRC publishes guidance for the amount of time it will take to approve your credit, but it can be faster or slower. As of January 2021, we are getting money for most of our clients within 30 days of submission.

Visit our FAQs page for frequently asked questions about R&D Tax Credits.

R&D Tax Credits Client Testimonials
F6S has helped thousands of startups like you, delivering more than £150 million in R&D Tax Incentives. Here’s what our clients say about their experience getting cash refunds and tax credits with F6S:
Glynn Jones
Founder of Scoopt
F6S helped Scoopt to receive a substantial R&D tax credit. I had investigated the process before meeting Dan and it really looked like a long-shot. Dan made the process simple and helped to compose the narrative and financials. I recommend F6S to every tech start-up that has invested in the research and development of intellectual property.
Toby Green
CTO, PlanSnap - plan with friends
F6S were quick, courteous, and most important, successful in helping us to receive our R+D tax credits - I would recommend them to others.
Marcel Cowan
Co-Founder, Fansparks
Great service, would recommend using this is you have been doing R&D for your startup.
Laurent Biancardini
Founder of Basaltis Ltd
All our R&D tax credits have been successful with F6S. The team is very efficient as they achieved great results and without needing too much of my time.
Alick Varma
Founder of Osper Ltd
The F6S team have been great. They have helped us make the most of the R&D opportunities offered by the government in a quick, simple and super efficient manner. They found costs we didnt think we could claim and also worked with us throughout the financial year to structure our costs so we could claim more. Thats why weve used them for the last three years on the trot.
F6S can help with your R&D claim