What is R&D tax relief?
In the UK, companies can claim tax relief for any research and development (R&D) activity they undertake. This scheme, which is backed by the government, aims to support innovation in businesses by providing tax relief to those that have tried to improve or overcome challenges with products and processes.
R&D activity is generally technology-based but is not limited to the science and technology sectors. It ranges from developing new technologies for a product or process or adapting an existing technology to meets the needs of a business. It can apply to products or services offered or internal activities.
Are you eligible for R&D tax relief?
Companies are eligible for R&D tax relief – which can be up to 33% of the total cost of the R&D spend – if within the past two years they have:
- Made bespoke or customised products
- Developed, modified or improved any products, processes or services
- Developed software or IT solutions
- Amended products due to changes in legislation
- Made improvements to their manufacturing processes
- Made prototypes or performed testing
- Invested in failed projects or developed products that didn’t launch.
For R&D tax relief, the refund tends to apply to the actual time spent on R&D activity in the business. It is calculated as a percentage of the salaries of staff who were involved in the R&D activity. You can also get tax relief on a percentage of any relevant subcontractor fees or staff costs paid to an external agency involved in the R&D process. However, R&D tax relief can’t be claimed back against dividends.
In addition, businesses can claim against the costs of any software bought for the project, as well as things like utility costs (gas, electricity etc) and wasted materials – anything used during the R&D activity.
For the purposes of R&D tax relief, an SME is a business that employs fewer than 500 people and has an annual turnover of less than £100 million or a balance sheet under £86 million.
It doesn’t matter if your SME is profit-making or loss-making, it will still qualify for R&D tax relief.