All you need to know about Research and Development tax relief

During the Chancellor’s Budget 2020 speech, Rishi Sunak confirmed an increase of tax relief to innovative businesses valued at £22 billion by 2024-25, as well as an additional £1.5 billion spread across all counties and British nations. 

This relief is reserved for those undertaking qualifying research and development (R&D) work, giving tax credits to firms investing time and money in pushing the boundaries in their respective industries.

What constitutes qualifying R&D?

Just investing money in a product or advancement that could be innovative for your industry isn’t enough to be eligible for R&D tax relief. The Government states that the projects must seek an advancement in either science or technology.

Your R&D projects must meet the following criteria:

  • You must be aiming to advance an aspect of science or technology in your sector
  • The end goal of your project must seek to overcome an element of uncertainty in your industry
  • You must have attempted to overcome this uncertainty by developing a new process, product or service
  • Your project could not be easily replicated by a fellow professional in your field

Businesses seeking to claim R&D tax relief cannot already be in receipt of state aid or subsidised expenditure.

The expenditure you claim for can only be attributed to the running costs of your qualifying project. It cannot be used to cover capital assets such as your premises or equipment.

Examples of qualifying R&D projects

 

  • Adaptation of working materials
    A project that involves altering the type of material or technology used in specific business conditions.

  • Design and manufacture of new products with improved technical performance
    A project based around the design and fabrication of new products that enhance the general performance of your business.
  • Modifying existing internal processes or systems
    A project that seeks to improve the efficiency, capacity or performance of internal processes or systems.
  • Developing new internal processes or systems
    A project that attempts to create new internal processes or systems to drive efficiencies, improve performance, capacity or even employee safety.

 

Available R&D tax relief schemes

  • SME scheme
    Those with fewer than 500 employees and have a turnover of less than €100m or a balance sheet of less than €86m are eligible for Small and Medium-Sized Enterprises (SME) R&D relief. The SME scheme allows you to deduct an additional 130% of your qualifying costs from your annual profits, on top of the normal 100% deduction, equating to a total 230% deduction. Even loss-making companies can also claim tax relief under the SME scheme, worth up to 14.5% of their surrenderable loss.

  • RDEC scheme
    The new Research and Development Expenditure Credit (RDEC) scheme replaces the former large company scheme. The RDEC scheme is applicable to companies with more than 500 employees. It can also be claimed by SMEs and large firms that are subcontracted to undertake R&D projects on behalf of large companies. Historically, the RDEC tax credit offers tax reliefs for 11% of your qualifying R&D expenditure, but this has been increased in recent years to 13% from 1st April 2020.