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R&D tax credits explained

Research and development (R&D) tax credits are a valuable government tax relief that rewards UK companies for investing in innovation.

  • Companies that spend money developing new products, processes or services; or enhancing existing ones, are eligible for a cash payment and/or Corporation Tax reduction.
  • R&D tax credit rates are the equivalent of up to 33p for every £1 of qualifying expenditure.
  • They can be used as an alternative to innovation grants for research and development funding. Sometimes they can complement them too.

If eligible, you can typically claim R&D tax relief for your last two completed accounting periods. In other words, while in your 2018 accounting period, you can consider your R&D tax credit 2017 and your R&D tax credit 2016.

They are calculated based on your R&D spend. Qualifying expenditure is identified and enhanced by the relevant rate (see below) to produce your ‘enhanced expenditure’. When deducted from your taxable profits, or added to your loss, this will give you a Corporation Tax reduction if you were profitable, a cash credit if you were loss-making, or a combination of the two.

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What counts as R&D?

For tax purposes, HMRC R&D requirements are purposefully broad. Whatever size or sector, if your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you may be carrying out qualifying activity. This could include:

  • Creating new products, processes or services.
  • Changing or modifying an existing product, process or service.

This means that if you’re not sure your project is scientifically or technologically possible, or you don’t know how to achieve it in practice, you could be resolving uncertainties and therefore qualify for R&D tax credits.

Within the accepted HMRC research and development definition, R&D doesn’t have to have been successful to qualify. You can also include work undertaken for a client as well as your own projects.

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What R&D costs can I claim for?

When putting together an R&D tax credit claim, we look for the following types of qualifying R&D expenditure:

  • Expenditure on staff including salaries, employer’s NIC and pension contributions.
  • Expenditure on subcontractors and freelancers.
  • Expenditure on materials and consumables including heat, light and power that are used up or transformed by the R&D process.
  • Expenditure on some types of software.

We help SMEs across all sectors receive millions of pounds every month to re-invest back into their businesses. Our team of chartered tax advisers save you time by preparing a robust claim that uncovers all of your R&D activity and costs. Our SME service is completely end-to-end, which includes dealing with HMRC on your behalf.

  • Most companies, including start-ups, fall into this category and can claim back up to 33p for every pound spent on R&D. They can receive a cash benefit, even if their business is loss-making.
  • The average claim made by SMEs in the UK is £53,876 (2016-17). See how much your business could potentially claim below.
  • R&D tax credit claims are made through the government’s SME R&D tax credit scheme, although there are a few exceptions outlined below.

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R&D tax credit scheme for SMEs

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