How To Claim R&D Tax Credit In The UK: A Step-by-Step Guide To R&D Tax Claims
Understanding how to claim R&D tax credit is essential for businesses investing in innovation. They reduce the amount of tax owed, which can then be used to fund further research and development, increase available cash or facilitate expansion into new markets. This guide explains the process of making R&D tax claims in the UK and how to maximise your benefits.
Understanding R&D Tax Credits
Before delving into the application process, it is crucial to understand what qualifies as R&D activities and the eligibility criteria. R&D tax credits are available for companies undertaking projects that seek to advance science or technology. This includes developing new products, processes, or services, or improving existing ones. Unsuccessful projects also qualify. The key is that the project must involve a degree of uncertainty that requires a systematic approach to problem-solving.
R&D Tax Credits Eligibility Criteria
To qualify for R&D tax credits, your company must:
- Be subject to Corporation Tax, e.g. a limited company, joint venture or partnership
- Undertake a qualifying project
- Have spent money on these activities and accounted for the cost under generally accepted accounting practice
Qualifying activities can include:
- Creating new products or services
- Enhancing existing products or services
- Developing new processes
- Improving existing processes
- Planning to resolve the technological uncertainty
- Technological design, testing and analysis
Types of R&D tax relief
Revenue expenses (e.g. staff costs) are allowable as a tax deduction against profits.
Capital expenditure (e.g. equipment) is eligible for a 100% R&D allowance.
In addition to the above, R&D expenditure is eligible for additional R&D tax relief.
There have been many changes to the R&D tax rules in recent years. There are two different types of R&D tax relief: the R&D expenditure credit (RDEC) and a scheme that is only available to certain loss-making SMEs. Before 1 April 2024, the SME scheme was the default for SMEs (regardless of whether they were profitable).
Steps to Claim R&D Tax Credits
Step 1: Identify Qualifying R&D Activities
The first step is to pinpoint which projects and activities qualify for R&D tax credits. This requires a thorough review of your company's operations and identifying areas where innovation and development occur. Keep detailed records of the processes, challenges faced, and solutions developed. For more information, explore our guide on what projects qualify for R&D tax credits.
Step 2: Gather Financial Records
Once you have identified your qualifying activities, the next step is to compile all relevant financial records. This includes costs related to staff salaries, software, materials, cloud costs, overheads, and any subcontractor expenses directly tied to the R&D projects. Accurate and detailed financial documentation is crucial for substantiating your claim with HMRC.
Step 3: Calculate the R&D Expenditure
Calculate the total expenditure on R&D activities. This involves summing up all qualifying costs associated with your R&D projects and applying the relevant restrictions to certain expenses. You may also benefit from signing a joint election with unconnected parties at this stage to help increase the benefit of your claim.
Step 4: Make an advanced notification to HMRC
For accounting periods beginning on or after 1 April 2023, companies claiming for the first time, or companies whose last claim was made more than three years ago, are required to notify HMRC within 6 months of the accounting period end date e.g. if your company's accounting period ended 31 March 2025, you must notify HMRC by 30 September 2025.
Step 5: Submit the Additional Information Form to HMRC
Since 8 August 2023, all claims must be submitted with an additional information form.
Step 6: Submit the Claim
After filling out the claim form, submit the R&D tax credit claim alongside your corporation tax return. Ensure you meet any deadlines for submission to avoid penalties or missed opportunities for claiming the R&D tax credit.
Tips for a Successful R&D Claim
- Consult with R&D Specialists: Engaging with professionals who specialise in R&D tax credits can greatly enhance your chances of a successful claim. They can provide insights, ensure compliance, and help maximise your claim.
- Maintain Detailed Records: Keeping comprehensive records of all R&D activities and associated costs is crucial. Detailed documentation will support your claim and make the process smoother.
- Understand the Legislation: Familiarise yourself with the specific R&D tax credit legislation. This will ensure you meet all eligibility criteria and understand the nuances of the claim process.
Frequently Asked Questions About R&D Tax Credits
1. How long does it take to receive R&D tax credits?
Once your claim is submitted with your Corporation Tax return, HMRC usually processes it within 6–8 weeks. Complex claims or periods of high demand may take longer.
2. Can loss-making companies claim R&D tax credits?
Yes. If your company is making a loss, you may be able to surrender the loss for a payable tax credit (cash back). This can be especially valuable for startups and innovative SMEs.
3. Do failed projects still qualify for R&D tax relief?
Yes. HMRC recognises that not all innovation is successful. As long as the project involved attempts to overcome scientific or technological uncertainty, the costs may still qualify.
4. What records do I need to keep for HMRC?
You should maintain detailed technical and financial documentation, including project descriptions, challenges faced, staff involvement, timesheets, and breakdowns of costs. Good record-keeping makes your claim more robust and audit-ready.
5. Can subcontractor and externally provided staff costs be included?
Yes, but the rules are strict. Payments to subcontractors and external staff can qualify, but the percentage you can claim can be restricted unless you sign elections with subcontractors to remove the restriction.
6. What happens if HMRC rejects my claim?
If HMRC challenges your claim, they may request more information. Working with an R&D tax specialist can reduce the risk of rejection and ensure you meet compliance requirements.
7. Is there a deadline for making an R&D tax claim?
Yes. You must submit your claim within two years of the end of your company's accounting period, but you may also need to make an advanced notification. Missing the deadline means losing the entitlement to relief.
Conclusion
Claiming R&D tax credits can be highly beneficial for businesses investing in scientific or technological advancements. By following the steps outlined in this guide, you can navigate the claim process effectively and ensure you maximise the benefits available to you. Remember, maintaining detailed records, understanding eligibility criteria, and consulting with specialists can significantly enhance your chances of a successful claim.
If you want to learn more please get in touch.