Please note the figures and calculations in this article are now out of date following the 1 April 2023 changes and are in the process of being updated
Corporation Tax and relief
Corporation Tax (CT) is a tax that must be paid by all limited companies. It is paid against profits the company makes. If no profit is made, no CT is due. Businesses can seek legitimate tax breaks to reduce their CT liability so that less or even no CT is due. This is known as tax relief but what exactly is tax relief?
What is R&D tax relief?
A business uses tax relief to quite literally relieve their tax liability. Since the millennium, the UK government has offered one particularly prominent Corporation Tax relief. It is for businesses carrying out research and development (R&D) and it is known as R&D tax relief.
Uptake of R&D tax relief – HMRC statistics
If you haven’t heard of R&D tax relief before, then you probably have some questions like: Are all companies in the UK claiming R&D tax relief? What percentage of companies are claiming R&D tax relief? Which sectors benefit most from R&D tax relief?
If you want answers to all these questions and more, read our summary of the 2023 R&D statistics. You can use this to benchmark your sector or region.
How R&D tax relief differs from R&D tax credits
The term R&D tax relief is often used interchangeably with R&D tax credits and again interchangeably with R&D tax incentives. All broadly relate to the same thing.
Strictly speaking, the concept of tax relief refers to reducing a tax liability. For SMEs, the incentive achieves this by allowing companies to enhance their R&D expenditure, so that they deduct more than they have actually spent when they calculate their taxable profits. Increasing their expenses means lowering their profits and therefore their tax liability.
However, where R&D tax credits are concerned, it’s possible for a loss-making company to claim a cash credit.
This is because the loss-making company doesn’t have profits to ‘relieve.’ Their tax credit is taken as cash, or sometimes offset against other cash amounts owed to HMRC. R&D tax credit is an accurate description because a credit can obviously be used either to offset or to be exchanged for cash.
What is the purpose of R&D tax relief?
However you refer to them, the benefits of R&D tax relief remain the same. R&D tax incentives reward businesses for innovation. Businesses who create new or improve products, processes or services gain a reliable source of funding.
The wider UK economy also benefits from increased spending on R&D. Did you know that for every £1 given out in R&D tax reliefs, up to £2.35 in R&D spending is stimulated? This spending takes the form of training or re-skilling technicians for advanced technologies and creates new jobs too. Which is why R&D tax credits are a key part of the government’s Industrial Strategy.
Calculate R&D tax relief
If you’re running a profit-making SME, then the correct calculation for R&D tax relief can lower the amount of tax you have to pay. The rate of relief is 25% — technically only if you remain profitable after the relief has been deducted. Many companies start profitable, but after deducting the enhanced expenditure, they become loss making. Their rate of relief is always less than 25%. If your business is loss-making then there are no profits to tax and your R&D work is instead rewarded with a cash ‘credit.’ The SME credit is worth up to 33% of qualifying costs for a loss-making business.
How much could you claim in R&D tax credits?
Calculate a ballpark figure based on your research and development project expenditure.
R&D tax relief rates
SME R&D tax relief
These diagrams show the headline R&D tax relief rate for SMEs. They are rounded to the nearest whole number.
What is an SME for R&D tax credit purposes?
Find out the origins of the definition of an SME for the purposes of deciding which R&D tax relief should be used.
This diagram shows the headline R&D tax relief rate for large companies. This is also rounded to the nearest whole number. Note that this RDEC rate is then subject to Corporation Tax to arrive at the actual benefit payable.
What are the benefits of RDEC in relation to the SME R&D tax credit scheme?
The benefits of the RDEC scheme are especially noteworthy for large companies. But they should also be considered by SMEs with grants or subcontracted R&D who previously disregarded a large company claim due to there being no immediate cash benefit.
Here’s a fictitious example to show how R&D tax relief works in practice.
An SME construction business, Smart-A-Build specialises in offsite manufacture of building components. They have claimed R&D tax relief every year since they first heard about it.
Their qualifying costs come from categories like materials (used to develop their modular solution – including for prototypes and installation) – and the wages of their CAD designers.
For the first time, their most recent claim also brought in software development costs. They had invested in the development of a bespoke supply-chain management software platform. This logistics software allows their construction clients (typically large developers) to integrate with Smart-A-Build’s enterprise resource platform (ERP).
The commercial benefit to their business of this software platform lies in the arrival time on site of their product – offsite-manufactured components. This optimisation helps their customers run projects more efficiently — with a just-in-time approach that prevents waiting on site and double handling. Altogether their costs for their latest R&D tax credit claim total £1,500,000.
Smart-A-Build was able to claim £370,500 in R&D tax relief against their Corporation Tax bill. This is calculated by enhancing the £1,500,000 R&D expenditure at 130%, then reducing their taxable profits by this amount, saving tax at 19%.
Some of this money was set aside for future investment and some was put into the hire of another CAD designer to support the company’s ambitions with BIM technology.
See HMRC’s latest official R&D statistics
Explore the latest trends in R&D tax relief, read our summary of the HMRC R&D statistics 2023.
Read more on R&D tax relief & R&D tax credits
Get the full picture of eligibility for SME R&D tax relief including who can and who cannot claim for R&D tax relief.
Find out more about claiming R&D tax relief. Everything you need to know about how to claim R&D tax relief is here.
Here you can view how to go about accounting for R&D tax relief under both the SME and RDEC schemes.
If you need a checklist for R&D relief of the costs qualifying for R&D relief then read tthis ForrestBrown KnowledgeBank article.