By Kaylin Sullivan
Research and Development (R&D) tax credits are a great way for startups to get cash back via a cash repayment or reduced tax bill. In this article, we’ll explain what R&D tax credits are, the types of projects that qualify, how much money you could claim back and how to make your claim.
Research and Development (R&D) tax credits are a government initiative to encourage businesses to invest in innovation. Companies that invest in research and development can claim a proportion of their R&D costs as a tax credit, which either reduces their tax bill or provides a cash repayment.
R&D tax relief is designed to offset the costs of developing new products, processes, or services, and to encourage companies to undertake more R&D activity to stimulate innovation and drive economic growth. R&D tax credits only apply to advances being made in the fields of science and technology, but there’s a lot of company activity that’s eligible within that - no matter what sector you’re in (more on this in the next section). You can claim R&D tax relief for projects whether they were successful or not.
Two types of R&D schemes are available to UK businesses: SME and RDEC. Which one you qualify for mainly depends on the size of your business.
SME R&D tax relief scheme
The SME scheme is for small and medium-sized businesses. You can claim a
higher rate of tax relief than a larger company: up to 33%.
To be eligible for the SME scheme, your company must: employ fewer than 500 people and have a turnover of under €100M (~£85M) or a balance sheet total of under €86M (~£73M).
RDEC scheme (Research and Development Expenditure Credit)
The RDEC scheme is for larger companies and SMEs that don’t qualify for the
SME R&D scheme. You can claim up to 10.53% of your company’s qualifying R&D
expenditure with RDEC.
The RDEC scheme is designed for companies that employ more than 500 people and have a turnover of more than €100M (~£85M) or have a balance sheet total of €86M or
Read RDEC scheme: what it is and how to claim for an in-depth explanation of RDEC.
To be eligible for R&D tax relief, your company must have worked on R&D projects, incurred qualifying R&D expenses in the last two financial periods and be based in the UK.
To successfully claim R&D tax relief, you need to show that your company
took a risk by investing money in trying to resolve a scientific or technological
uncertainty. The idea is that you should be rewarded for trying to advance
scientific or technological knowledge and capabilities – no matter which sector
your company is in.
Examples of R&D projects that may qualify for tax credits include:
Within the R&D projects, there are certain costs that qualify too, which include:
Read more about this in Qualifying R&D expenditure: which costs qualify for R&D tax credits?
The type and amount of tax relief you can claim depends on how much you’ve
spent, what you’ve spent it on and whether your company is making a profit.
If your company is making a loss - you can claim up to 33% of your R&D spend
as a direct cash payment.
If your company is making a profit - you can reduce your Corporation Tax bill
or receive a refund for overpaid tax. This reduction will be around 25% of your
If you want to estimate how much you could claim back from R&D tax credits, head to SeedLegals’ R&D tax credits calculator.
You claim R&D tax credits through your company’s Corporation Tax return
(CT600) which is submitted annually and based on the figures from your
Corporation Tax computation and statutory accounts.
You’ll need to submit the tax computation, tax return (CT600) and your Technical Narrative (if you have prepared one) to HMRC. A technical narrative is a written description of how your project sought to make an advancement.
You can prepare and submit your R&D claim yourself, or ask your accountant to help. You could also use a software service like SeedLegals, which can help you speed up and maximise your claim.
SeedLegals combines unlimited support from R&D tax credits experts with quick-to-build, automated forms. They can help you create your claim and ensure that you cover everything so you maximise the amount you get back. If you’re interested in making an R&D tax claim or just want to know more about the process, book a call with a SeedLegals R&D expert or start your 7-day free trial.