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The history of R&D tax credits in the UK

As a UK business owner, an FD, IFA or accountant; you’re relied upon for informed financial decision making. Yet you can’t be expected to keep abreast of every minute R&D tax credit change. At ForrestBrown, R&D tax credits is what we do, day in, day out.

That’s why ForrestBrown is the largest R&D tax credit specialist in the UK and was named ‘best independent consultancy firm’ by Taxation Awards 2018. More than 500 advisers trust us to bring the value of R&D tax credits to their clients.

Since their introduction in 2000, R&D tax credits have been widely regarded as a resounding success. Having survived numerous government changes and the 2008 financial crisis, R&D tax credits remain a central pillar of government business policy today.

The key policy announcements and subsequent R&D tax changes are summarised in our timeline below. These provide a helpful context to making a claim with ForrestBrown.

2020

Corporation Tax cut

Corporation Tax cut

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The Corporation Tax rate will reduce to 17%.

  • The changing Corporation Tax rate affects the claim benefit both SMEs and large companies receive.

  • For SME claims, a reducing Corporation Tax rate erodes the claim benefit profit-makers receive.

  • Conversely, under RDEC, the Corporation Tax reduction increases the generosity of RDEC.

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PAYE & NIC cap reintroduced

PAYE & NIC cap reintroduced

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A new PAYE and NIC cap for the SME payable credit is introduced.

  • To prevent abuse of the SME payable R&D tax credit, the government announces that it will reintroduce a PAYE and NIC cap on the SME payable credit.

  • It will be like the cap that was abolished in 2012.

  • For accounting periods beginning on or after 1 April 2020, the maximum payable R&D tax credit a company can claim will be set at 300% of the company’s total PAYE and NIC liabilities for the period.

  • Companies who rely on a contract workforce need to consider the impact of this new restriction on their R&D tax credit claim benefit.

  • This new cap increases uncertainty, as now an SME’s salary bill will also affect the value of its R&D tax credit.

Have you read our blog on the Autumn Budget 2018?

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2018

RDEC rate increased

RDEC rate increased

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The RDEC rate is increased to 12%.

  • The main RDEC rate is increased incrementally for the second time since its introduction, taking the RDEC benefit rate to 10%.

  • This increase in generosity is good news for large companies – as well as the SMEs who also use the RDEC R&D tax credit scheme.

  • Large companies should be particularly enthusiastic about it, as they already benefited from an increase in generosity when the new 19% Corporation Tax rate came into effect on 1 April 2017.

Have you read our blog on the Autumn Budget 2017?

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2017

Corporation Tax cut

Corporation Tax cut

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The main rate of Corporation Tax is decreased from 20% to 19%.

  • The changing Corporation Tax rate affects the claim benefit that both SMEs and large companies receive.

  • For SME claims, a reduced Corporation Tax rate erodes the claim benefit that profit-makers receive.

  • Conversely, under RDEC, the Corporation Tax reduction increases the generosity of RDEC.

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2016

Large company super deduction scheme abolished

Large company super deduction scheme abolished

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The large company super deduction scheme is abolished.

  • After a transition period where both the large company super deduction scheme and RDEC ran in parallel, the super deduction is abolished for expenditure incurred after this date.

  • Most large companies transition to RDEC at the earliest opportunity, to access the additional benefits it offers, including a higher benefit rate, greater visibility and a cash credit for loss-making companies.

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2015

Corporation Tax simplified

Corporation Tax simplified

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The main rate of Corporation Tax is reduced to 20% and is merged with the small profits rate.

  • Prior to this, the rate of Corporation Tax a company paid was dependent on its taxable profits.

  • There were two rates: the main rate and the small profits rate. There was also marginal relief for some companies.

  • This complexity affected the benefit rate a company received for its R&D tax credit claim, which created uncertainty for claimants.

  • Part of a long-term plan from the government, from this point all UK companies pay Corporation Tax at the same rate.

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SME scheme enhancement rate increased

SME scheme enhancement rate increased

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The amount R&D expenditure is enhanced by is increased from 125% to 130%.

  • Rate change increases the benefit rate for SME R&D tax credit claims.

  • Profit-makers paying tax at the small profits rate (20%), see their benefit rate increase from 25% to 26%.

  • For loss-making companies, the maximum available payable R&D tax credit increases from 32.63% to 33.35%.

  • This rate change is linked to new rules restricting the eligibility of expenditure on consumables.

  • Some companies lose out significantly, but all claimants gain a marginal increase in overall generosity.

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RDEC scheme improved

RDEC scheme improved

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The RDEC rate is increased to 11%.

  • Just two years after being introduced, RDEC claimants receive a welcome boost with an increase in the main rate of RDEC.

  • Change increases the benefit for RDEC claims from 7.9% to 8.7%.

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Eligibility of consumables costs

Eligibility of consumables costs

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The government introduces tighter rules on the eligibility of ‘consumable’ materials and prototypes attributable to R&D projects.

  • Companies can no longer claim the cost of materials if they go on to be sold to customers.

  • Change follows a period of discussion at HMRC’s R&D Consultative Committee, which had resulted in new HMRC guidance being issued on the subject in 2012.

  • Just three years later, this new legislation clears up the issue once and for all.

Have you read our blogs?

Consumables: what’s in and what’s out? Read more >

What costs qualify for R&D tax credits? Read more >

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2014

Corporation Tax decreases

Corporation Tax decreases

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The main rate of Corporation Tax is cut from 23% to 21%.

  • The small profits rate remains at 20%, while the main rate moves another step closer to meeting it.

  • The changing Corporation Tax rate affects the claim benefit both SMEs and large companies receive.

  • For SME claims, a reducing Corporation Tax rate erodes the claim benefit profit-makers receive.

  • Conversely, under RDEC, the Corporation Tax reduction increases the generosity of RDEC.

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SME credit rate boosted

SME credit rate boosted

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A significant boost is implemented, increasing the SME payable credit rate from 11% to 14.5%.

  • This increase to the credit rate is enacted without amending the enhancement rate.

  • Loss-making SMEs benefit from a boost to their claim benefit (24.75% up to 32.63%), whereas profit-makers miss out.

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2013

Corporation Tax decreases

Corporation Tax decreases

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The main rate of Corporation Tax reduces from 24% to 23%.

  • Small profits rate remains at 20%, while the main rate is decreased as the government moves towards one rate of Corporation Tax for all UK companies.

  • Changing Corporation Tax rate affects the claim benefit both SMEs and large companies receive.

  • For SME claims, a reducing Corporation Tax rate erodes the claim benefit profit-makers receive.

  • Conversely, under RDEC, the Corporation Tax reduction increases the generosity of RDEC.

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RDEC incentive introduced

RDEC incentive introduced

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Research and Development Expenditure Credits (RDEC) are introduced to replace the previous large company scheme.

  • After a period of consultation, RDEC is created to address feedback from industry on the existing large company super deduction scheme.

  • RDEC seeks to provide greater visibility, certainty and value for loss-making companies, by allowing the benefit to be accounted for in ‘profit-before-tax’ in a company’s accounts (rather than as part of the tax charge)

  • This decouples the benefit of RDEC from the company’s tax position and provides a cash credit for companies with no tax liability.

  • On introduction, the RDEC rate is 10%. As the credit is taxable income, that meant the benefit RDEC claimants received was 7.6%.

Have you read our blog on RDEC explained?

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2012

Restriction of R&D tax credits removed

Restriction of R&D tax credits removed

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PAYE and NIC liabilities cap (that has been part of the SME scheme since the start) is now removed.

  • Liabilities cap removed that previously limited the amount of payable credit a company could claim to the total value of its PAYE and NIC liabilities.

  • Removal of this cap part of a number of positive measures for R&D tax credit claims.

  • The government re-introduced a PAYE and NIC cap in the 2018 Autumn Budget, to address potential abuse of R&D tax credits.

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Minimum spend is removed completely

Minimum spend is removed completely

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The £10,000 minimum level of expenditure a company must incur to make a claim is removed.

  • With no lower limit on claim value, SMEs of any size can now access this valuable incentive.

Have you read our KnowledgeBank article on the minimum amount of expenditure for an R&D tax credit claim?

Read more
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Definition of Externally Provide Workers (EPW) is amended

Definition of Externally Provide Workers (EPW) is amended

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Change removes the ‘tripartite arrangements test,’ which required a restrictive set of conditions to be met for externally provided workers expenditure to qualify.

  • Prior to this change, EPW expenditure is excluded if an individual worker uses a personal service company, and then engages with a company via an agency.

  • This follows years of discussion between advisers and HMRC via HMRC’s R&D Consultative Committee and provides welcome clarity for innovative businesses resourcing their projects with contract staff.

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Corporation Tax reduction

Corporation Tax reduction

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Corporation Tax is reduced in part.

  • The small profits rate remains at 20%, while the main rate is decreased from 26% to 24% as the government moves towards one rate of Corporation Tax for all UK companies.

  • The changing Corporation Tax rate affects the claim benefit both SMEs and large companies receive.

  • A reducing Corporation Tax rate erodes the R&D credit claim benefit that profit-makers receive.

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SME relief rates changed

SME relief rates changed

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The SME relief rate is increased from 100% to 125% and the payable credit is decreased from 12.5% to 11%.

  • New and favourable rates for the SME scheme are great news for small companies using R&D tax credits to grow their businesses.

  • The corresponding increase in the enhancement rate and decrease in the credit rate means that loss-making companies receive the same benefit before and after the change (25%). Profit-making companies receive a small boost to their benefit rate.

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Definition of production is revised

Definition of production is revised

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New guidance on the production of goods and services is published in CIRD Manual.

  • Guidance published following a consultation period with HMRC’s R&D Consultative Committee.

  • It clarifies the eligibility of materials costs where companies produce prototypes or run manufacturing trials for R&D that also produce goods and services for customers.

  • This new guidance exemplifies collaboration between HMRC and adviser to achieve clarity for R&D tax credit claimants.

  • Although, this guidance is short-lived as new legislation changes the rules again in 2015.

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2011

Online filing for Corporation Tax made compulsory

Online filing for Corporation Tax made compulsory

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By 2011, most companies were already using online software to file their Corporation Tax returns.

  • R&D tax credit claims form part of a company’s tax return, therefore the most common way to file an R&D tax credit claim is online.

  • This also speeds up the processing times as it minimizes the manual intervention at HMRC’s end of the process.

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Corporation Tax rates cut

Corporation Tax rates cut

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The main rate of Corporation Tax decreases from 28% to 26% and the small profits rate decreases from 21% to 20%.

  • These changes are part of the government’s aim to ultimately achieve a single rate of Corporation Tax for all companies.

  • Over the period from 2002 to 2015 the main rate of Corporation Tax reduces from 30% to 20%.

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SME scheme rates improved

SME scheme rates improved

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The SME R&D tax credit scheme rates are improved so that the relief offered to SMEs is increased from 75% to 100% and decreased in payable credit from 14% to 12.5%.

  • New and favourable rates for the SME scheme are great news for small companies using R&D tax credits to grow their businesses.

  • This marks the second increase in rates to the SME R&D tax credit scheme since its introduction.

  • The corresponding increase in the enhancement rate and decrease in the credit rate means that loss-making companies receive approximately the same benefit before and after the change (25%). Profit-making companies receive a small boost to their benefit rate.

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2009

The Intellectual Property (IP) condition for SMEs is…

The Intellectual Property (IP) condition for SMEs is removed

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Prior to this change, under the SME R&D tax credit scheme, SMEs claiming R&D tax credits had to show that the IP generated vested with it.

  • A positive move that simplified the eligibility criteria for SMEs, particularly around the complex area of IP.

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HMRC broaden qualifying activities

HMRC broaden qualifying activities

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HMRC announces a change of interpretation allowing Qualifying Indirect Activities (QIA) to qualify for R&D tax relief.

  • QIAs are activities which do not directly contribute to the resolution of technological uncertainty, but indirectly support the project. They include admin, finance, personnel, security and maintenance activities.

Have you read our KnowledgeBank article on How to allocate an employee’s time for an R&D tax credit claim?

Read more
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2008

Definition of SME amended

Definition of SME amended

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The SME definition is revised, doubling the thresholds for headcount, annual turnover and balance sheet assets.

  • Headcount limit is increased from 250 to 500.

  • Annual turnover limit is increased from €50 million to €100 million.

  • The limit for balance sheet total is increased from €43 million to €86 million.

  • This widening of the scope of the SME R&D tax credit means more companies can benefit from the more favourable relief-rates for SMEs. It also increased the scope for international companies to benefit from the UK’s R&D tax incentives.

Have you read our KnowledgeBank article on what an SME is?

Read more
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SME scheme rates enhanced

SME scheme rates enhanced

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The SME R&D tax credit scheme rates are improved.

  • New and favourable rates for the SME scheme are great news for small companies using R&D tax credits to grow their businesses.

  • Increase in SME scheme relief from 50% to 75% and decrease in payable credit from 16% to 14%.

  • Corresponding increase in the enhancement rate and decrease in the credit rate means that loss-making companies receive approximately the same benefit before and after the change (24% vs 24.5%).

  • Profit-making companies received a small boost to their benefit rate.

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Large company scheme change

Large company scheme change

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The large company scheme enhancement rate increases.

  • The relief for large companies increases from 25% to 30%.

  • The benefit rate is improved from 7.5% to 8.4%

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Corporation Tax rates change

Corporation Tax rates change

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The Corporation Tax rate for small companies is increased again to 21%. The main rate of Corporation Tax is decreased from 30% to 28%.

  • The changing Corporation Tax rate affects the claim benefit both SMEs and large companies receive.

  • A reducing Corporation Tax rate erodes the claim benefit profit-making companies receive. Increasing Corporation Tax rates make the relief more valuable.

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Claim time reduction

Claim time reduction

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A significant time-limit reduction is introduced for R&D tax credit claims.

  • The time limit for making a claim is reduced from six years after the end of an accounting period to two years.

Have you read our KnowledgeBank article on how far back you can claim R&D tax relief?

Read more
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2007

Corporation Tax rate change

Corporation Tax rate change

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The Corporation Tax rate is changed back to 20% for small companies.

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2005

How to claim for intangible assets

How to claim for intangible assets

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New rules are introduced on how to claim for intangible assets.

  • Revenue R&D expenditure capitalized as an intangible asset can now be claimed in the year it is incurred, rather than as amortised.

  • This important change ensures that companies who had capitalised R&D costs could still maximise the benefit of their R&D tax credit claims.

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A new definition of SME

A new definition of SME

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The EU introduces a new recommended (2003/361/EC) definition of SME.

  • The new definition isn’t intended to change the status of an SME, simply to provide a clearer definition for companies to apply.

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2004

Amends to the definition of staffing costs

Amends to the definition of staffing costs

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The staffing costs definition introduced on 6 April 2003 is updated to exclude benefits in kind.

  • ‘Staff benefits in kind’ were not intended to form part of qualifying expenditure on staff costs.

  • Changes to other sections of the legislation had inadvertently allowed their inclusion.

  • Here the government repeals its legislative hiccup and finally exclude staff benefits in kind.

  • During the period of uncertainty, claims that included these costs are honoured.

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New costs that can be recouped are introduced

New costs that can be recouped are introduced

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Expenditure on consumable items and computer software is classified as qualifying expenditure for both SMEs and large companies.

  • Expenditure on the materials consumed or transformed in the R&D process can now be included in your claim. Materials that are consumed or transformed in during the R&D process are defined as consumables: this category includes water, fuel, and power.

  • This is great news for companies who invest in building prototypes as part of their R&D efforts. It is a major positive for manufacturers who invest in process development projects which involve running R&D.

  • Expenditure on computer software involved in R&D activities can now also be included.

Have you read our Knowledge Bank article on what costs qualify for R&D tax credits?

Read more
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Legislative changes are made to the definition of…

Legislative changes are made to the definition of R&D for tax purposes

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A new meaning of R&D is issued in the form of the 2004 DTI guidelines.

  • These guidelines still used today to define what counts as R&D.

  • They are purposefully broad to apply equally to businesses of different sizes and sectors.

Do you know how to know if you or your client are carrying out R&D?

Read more
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2003

SME scheme minimum spend removed

SME scheme minimum spend removed

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Minimum spend on eligible R&D in an accounting period reduced from £25,000 to £10,000.

 

  • Until now, the minimum spend condition prevented smaller companies from claiming R&D tax credits.

  • It also prevented companies in the early stages of a project claiming and those where finance was limited were out too, regardless of the nature of the project.

  • Now the minimum spend threshold is removed. This is great news for the smallest businesses.

  • The minimum spend is later abolished completely.

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SME scheme staffing costs simplified

SME scheme staffing costs simplified

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The ’80:20’ split for expenditure on staffing costs is removed.

  • Companies claiming R&D tax credits provide feedback to HMRC that the 80:20 rule, (which was designed to make claiming simpler) is creating an additional administrative burden.

  • The government removes this rule, responding quickly to early feedback on the new incentive.

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SMEs’ External Provided Worker (EPW) expenditure eligible

SMEs’ External Provided Worker (EPW) expenditure eligible

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New expenditure category is introduced, to allow SMEs to claim for agency workers engaged on R&D projects.

 

  • Following a period of controversy, EPW category (designed to allow companies to include agency workers in their claims) is changed to ensure the legislation continued to meet policy intent.

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Changes to the large company scheme

Changes to the large company scheme

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  • Large company scheme minimum spend on eligible R&D in an accounting period set at £10,000.

  • Under the large company scheme, expenditure on Externally Provided Workers (EPWs) is classified as eligible.

  • Under the large company scheme, the ’80:20’ split for expenditure on staffing costs is removed.

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SMEs access the large company incentive

SMEs access the large company incentive

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SMEs gain ability to claim under the large company scheme if they do not meet the eligibility criteria for the SME R&D tax credit.

  • SME R&D tax credits cannot be claimed, or are restricted, if a project has received grant funding, or if the company is acting as a subcontractor. In these circumstances, SMEs are eligible to claim under the large company scheme.

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A temporary change to the definition of staffing…

A temporary change to the definition of staffing costs is introduced in error

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For both SME and large company schemes, the definition of staffing costs changes to include certain benefits in kind.

  • Changes to other parts of tax legislation are used to define staff costs for R&D tax credit purposes.

  • Erroneously, benefits in kind become eligible cost category for R&D tax credit purposes.

  • Change is identified as accidental and repealed a year later, in April 2004.

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2002

The Corporation Tax rate for SMEs is reduced…

The Corporation Tax rate for SMEs is reduced from 20% to 19%. The main rate of Corporation Tax is 30%.

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R&D tax relief for large companies is introduced.

R&D tax relief for large companies is introduced.

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The large company scheme is introduced.

 

  • Following the successful introduction of the SME R&D tax credit scheme, an equivalent incentive for large companies is introduced.

The relief available for large companies is similar to that for SMEs, however the rate of relief is lower (7.5%) and there is no payable tax credit for large companies.

Have you read our blog post on R&D and capital allowances?

Read more>
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2001

R&D capital allowances are introduced.

R&D capital allowances are introduced.

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The Capital Allowances Act 2001 is published, providing relief for capital expenditure on R&D.

  • R&D capital allowances (RDAs) are introduced to replace Scientific Research Allowances.

  • RDAs provide tax relief for capital expenditure on R&D. They use the same definition of R&D as R&D tax credits (2000 DTI Guidelines).

  • Have you read our blog post on R&D and capital allowances?
    Read more>

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2000

The original guidelines on the meaning of research…

The original guidelines on the meaning of research and development published.

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The meaning of R&D issued in the 2000 DTI guidelines.

 

  • The Department of Trade and Industry drafts the first iteration of the definition of R&D for tax purposes, which HM Treasury publishes. This makes the DTI guidelines the official definition of R&D for tax purposes.

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R&D tax credits are launched for SMEs

R&D tax credits are launched for SMEs

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Research and development tax relief first introduced.

  • After a consultation period, the first R&D tax incentive regime is introduced for small and medium-sized companies by the incumbent Labour government, under Chancellor Gordon Brown.

  • The system offers SMEs who undertake R&D a reduction in Corporation Tax and/or a payable credit.

  • UK joins a number of other countries already offering similar tax incentives to drive innovation.

  • The government aims to improve R&D spend as a percentage of GDP to 3% from a position of 1.7%.

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The minimum spend on eligible R&D in an…

The minimum spend on eligible R&D in an accounting period is set at £25,000 a year.

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