Changes to the SME R&D scheme from 1st April 2023 mean that all expenditure incurs a deduction of 86% (down from 130%), and the SME credit rate changes to 10% (down from 14.5%), except for loss-making SMEs. For businesses claiming RDEC, as of 1st April 2023, the expenditure rate has increased to 20% (up from 13%).
Unfortunately, many companies are wholly unaware that the tax credit exists. Even if they are aware, they might not consider their company’s business-related activities to fall under “Research and development.” At the centre of the government’s plan is a push to educate the public on the existence of the R&D tax credit, including a clear, concise view of the necessary qualifications and process for claiming the benefit.
For accounting periods starting on or after 1 April 2023, businesses planning to claim Research and Development (R&D) tax relief or expenditure credit must now submit a claim form to HMRC if it is your first time claiming, or if your last claim was submitted three years prior to the end of the claim notification period.
Beginning 8 August 2023, there was a new requirement for businesses claiming Research and development (R&D) tax relief or expenditure credit in the UK. This change requires the completion of an additional form to HMRC alongside any claim for R&D tax benefits.
Following the Autumn Statement 2023, starting from 1 April 2024, the existing R&D tax relief schemes for small and medium-sized businesses (SMEs) and the Research and Development Expenditure Credit (RDEC) scheme for larger companies will merge into one scheme. This merged scheme will mostly align with the existing RDEC structure and offer a standard relief rate of 20%.
This aims to simplify the R&D tax relief process by creating a single, streamlined system. In conjunction with the new unified scheme, the more generous SME scheme will remain in place but only for loss-making R&D Intensive Companies.
Loss-making R&D intensive companies are those whose qualifying R&D expenditure constitutes at least 40% (from 1 April 2023) or 30% (from 1 April 2024) of total expenditure (splitting accounting periods as required). Total expenditure for this purpose will be calculated from the total expenses figure in the profit and loss (P&L) account, adjusted by adding any amount of expenditure used under s1308 Corporation Tax Act (CTA) 2009 and by subtracting any amount not deductible for CT purposes. While this higher rate is intended to apply for the 2023/24 tax year, it will be legislated for in Finance Bill 2023-24 which is expected to become law in spring 2024, therefore, these relief rates cannot yet be used for accounting purposes.
HMRC is now stepping up its efforts to identify errors and fraudulent R&D tax credit claims by increasing compliance checks. Businesses are advised to review past claims, to thoughtfully respond to HMRC communications, and to prepare for heightened scrutiny moving forward. This includes the necessity of understanding the rationale behind any claims and ensuring they align with HMRC.
If you have doubts about the validity of your R&D claim, our team can help assist in aligning your claim with HMRC’s guidelines. Contact us today for more details and support.
How DS Burge & Co takes the stress out of R&D Tax Credits
- If you need help determining if you qualify for R&D tax relief we can help review your business activities and see if any of your projects meet the specified criteria
- The scope of your project must rise to a certain level in order to qualify for the credit. We can help calculate your qualified costs so you understand what relief you are eligible for
- We can also help with other areas such as VAT returns. Using us to help with your accountancy needs gives you the time to focus on innovating and pushing technological advancements.
- As with other areas of tax, we can act on your behalf for any correspondence with HMRC.
Need help determining if you qualify for R&D tax relief ?
If you'd like to find out more about our R&D tax services or need help calculating your qualified costs, please don't hesitate to get in touch
How Do R&D Tax Credits Work?
The R&D tax credit is designed to reward companies with additional incentives for engaging in research that contributes to their field's prosperity. The money obtained from R&D tax credit utilisation can easily be reinvested in your company, letting you hire staff and get the resources necessary to scale your operations to meet the demands of your innovation.
Research-based tax relief can come in several forms, depending on your company's size and the scheme you file under. Those schemes include:
- Small and medium-sized enterprises (SME) tax relief, including both profitable and loss-making companies
- Research and development expenditure credit (RDEC)
Therefore, depending on which scheme you are eligible for, you may receive your tax relief in any of the following ways:
- Cash rebate
- Corporate tax relief
You may apply for relief up to two accounting cycles (24 months) after your R&D activities have concluded.
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Claiming R&D Tax Credits
Eligible projects
The R&D tax credit offers businesses an attractive incentive to engage in business-related research, but how do you know if your project qualifies? Fortunately, the government gives a clear prescription for eligibility.
Your innovative venture must be scientific or technological advancement, and it must be concrete; you cannot gain tax relief for something theoretical without a clear application to an existing industry. To know if your project qualifies for R&D tax relief, you must be able to answer these four questions:
- Does my research seek to make advancements in my field?
- Have qualified professionals within my field previously been unable to solve this particular problem?
- Was the efficacy of my proposed solution surrounded by uncertainty before I completed my research?
- Can I demonstrate a clear and repeatable method for eliminating that uncertainty?
Qualifying costs
The scope of your project must rise to a certain level to qualify for the credit. Assuming it does, what costs can you include when calculating your benefit?
- Staffing costs, including salaries and retirement contributions
- All subcontractors used in pursuit of the research
- Many types of specialised software
- Consumable items
- Payments to clinical trial volunteers
- Data licences and cloud computing software (new from 1 April 2023)
- Pure mathematics costs (new from 1 April 2023)
According to HRMC, the following costs are unfortunately excluded when figuring your relief amount:
- Production of goods and services
- All capital expenditures
- Infrastructure such as land
- Trademark development
Commonly asked questions
What happens if your project fails to achieve the proposed solution? As long as the research effort was made in good faith, you are still eligible to claim your expenditures.
What if your UK-based company is currently operating overseas? From 1 April 2024, most overseas costs are no longer claimable unless there are legal, regulatory, or environmental reasons why the work must be performed abroad.
Can I still claim if I’m a subcontractor?
Yes, you may qualify if you are undertaking R&D for another company, depending on the contractual arrangement and whether your company retains the risk of the R&D.
Enhanced R&D Intensive Support (ERIS)
If your business is an SME and your R&D expenditure represents at least 30% of your total expenses, you may qualify for continued support under the SME regime through the Enhanced R&D Intensive Support (ERIS).
- You can still receive the 14.5% repayable tax credit on surrenderable losses.
- This is particularly beneficial for loss-making companies that are highly innovative but not yet profitable.
Comparing Scheme Rates Over Time
The UK Government has made several adjustments to R&D tax relief over the past few years. Depending on the size of your company and your accounting period, different schemes and rates may apply. The table below provides a summary of the changes and how they impact profit-making and loss-making companies.
| SME Scheme (up to 31 Mar 2023) | SME Scheme (from 1 Apr 2023) | RDEC Scheme (up to 31 Mar 2023) | RDEC Scheme (from 1 Apr 2023) | Merged Scheme (from 1 Apr 2024) | |
|---|---|---|---|---|---|
| Profit-making company | 130% enhancement on costs = approx. 24.7% tax saving | 86% enhancement on costs = approx. 21.5% tax saving | 13% credit = ~10.5% net benefit | 20% credit = ~14.7%–16.2% net benefit* | 20% credit = ~14.7%–16.2% net benefit* |
| Loss-making company | 230% of costs x 14.5% = ~33.4% payable credit | 186% of costs x 10% = ~18.6% payable credit | 10.5% repayable subsidy | 15% repayable subsidy | 16.2% repayable subsidy |
| R&D-intensive SME** | N/A | 186% of costs x 14.5% = ~26.97% repayable credit | N/A | N/A | N/A |
R&D in action
Progress and innovation can be grey areas, even with HMRC’s guidelines. Some real-world examples of qualifying R&D include:
- Developing new raw materials to enhance performance or sustainability
- Improving environmental performance through technological innovation (e.g. reducing emissions, optimising energy use)
- Advancing automation systems that solve complex problems or improve efficiency
- Creating new or significantly improved IT infrastructure requiring novel integration or software development
- Designing construction processes that overcome technical challenges to improve safety, sustainability, or cost-effectiveness
- Reformulating products such as food, chemicals or pharmaceuticals to meet new health, safety or regulatory standards