R&D tax relief rates (pre-April 2023)
There are two R&D tax relief schemes:
- the Small and Medium Sized Enterprise (SME) scheme;
- the R&D Expenditure Credit (RDEC) scheme.
Broadly, SME R&D tax relief is available to companies (including those under common control) with less than 500 employees and either:
- a turnover of under €100m, or
- a balance sheet total under €86m.
SME scheme
When calculating tax-adjusted profits/losses, an SME incurring qualifying R&D expenditure can claim an enhanced deduction equal to 230% of eligible costs; i.e. an additional deduction of 130% on the company’s tax computation.
Profit-making SMEs can save tax at a rate of approximately 25% of qualifying expenditure (130% x 19% corporation tax).
Loss-making SMEs can surrender losses (up to 230% of qualifying costs) in return for a tax credit repayment resulting in a cash repayment of up to 33.35% of qualifying expenditure (230% x 14.5%).
[From April 2021, the SME tax credit repayment will be subject to a restriction equal to three times the company’s PAYE & NIC liabilities.]
RDEC scheme
The RDEC can be claimed by large companies and some SMEs (SMEs who have received R&D funding or have had certain projects ‘contracted’ to them).
The gross RDEC is worth 13% of qualifying expenditure (12% prior to 1 April 2020, 11% prior to 1 January 2018). This credit is taxable and net relief is approximately 10% of eligible expenditure.
The RDEC is offset against the company’s corporation tax liability.
Where there is no tax liability the company will receive a cash repayment equal to the net credit (subject to PAYE/NIC restriction).
SME scheme
| Loss-making company qualifying costs £100k | Profit-making company qualifying costs £100k |
|---|---|
| Enhanced deduction: 130% £130,000 (deducted on tax comp) Maximum losses: £230,000 (£100k + £130k) Surrendered for credit: 14.5% | Enhanced deduction: 130% £130,000 (deducted on tax comp) Save tax at 19%: |
| £33,350 £33,350/£100,000 = 33.35% | £24,700 £24,700/£100,000 = 24.7% |
RDEC scheme
| Qualifying costs £100,000 |
|---|
| Gross credit of 13%: £13,000 Less tax at 19% Net credit £10,530 • Offset against CT liability • Repayment if no liability |
| £10,530/100000 = 10.53% (rate prior to 1/4/2020 is 12%) |
R&D tax relief rates (post-April 2023)
SME scheme
When calculating tax-adjusted profits/losses, an SME incurring qualifying R&D expenditure can claim an enhanced deduction equal to 186% of eligible costs; i.e. an additional deduction of 86% on the company’s tax computation.
Profit-making SMEs can save tax at a rate of between 16% and 21% of qualifying expenditure, depending on whether they pay corporation tax at 19% or 25%.
Loss-making SMEs can surrender losses (up to 186% of qualifying costs) in return for a tax credit repayment resulting in a cash repayment of up to 18.6% of qualifying expenditure (186% x 10%).
[From April 2021, the SME tax credit repayment will be subject to a restriction equal to three times the company’s PAYE & NIC liabilities.]
RDEC scheme
The RDEC can be claimed by large companies and some SMEs (SMEs who have received R&D funding or have had certain projects ‘contracted’ to them).
The gross RDEC is worth 20% of qualifying expenditure (13% prior to April 2023, 12% prior to 1 April 2020, 11% prior to 1 January 2018). This credit is taxable and net relief is approximately 10% of eligible expenditure.
The RDEC is offset against the company’s corporation tax liability.
Where there is no tax liability the company will receive a cash repayment equal to the net credit (subject to PAYE/NIC restriction).
SME scheme
| Loss-making company qualifying costs £100k | Profit-making company qualifying costs £100k |
|---|---|
| Enhanced deduction: 86% £86,000 (deducted on tax comp) Maximum losses: £186,000 (£100k + £86k) Surrendered for credit: 10% | Enhanced deduction: 86% £86,000 (deducted on tax comp) Save tax at 25%: |
| £18,600 £18,600/£100,000 = 18.6% | £21,500 £21,500/£100,000 = 21.5% |
RDEC scheme
| Qualifying costs £100,000 |
|---|
| Gross credit of 20%: £20,000 Less tax at 25% Net credit £15,000 • Offset against CT liability • Repayment if no liability |
| £15,000/100000 = 15% (rate prior to 1/4/2023 is 13%) |
Corporation tax rates
| From 1 April 2023 | From 1 April 2017 | |
|---|---|---|
| Main rate of corporation tax | 25% | 19% |
R&D capital allowances (RDA)
Capital expenditure on assets such as equipment, machinery and business vehicles is not eligible for R&D tax relief.
Generally, capital expenditure is not deductible when calculating the company’s taxable profits; instead, capital allowances may be claimed.
There are several different types of capital allowance, including:
- Plant and machinery – 100% annual investment allowance (first year only);
- Energy and water-efficient equipment 100% (first year);
- Plant and machinery – annual reducing balance 18% (annual);
- Integral features – annual reducing balance 8% (annual);
- Patent rights and know-how – annual reducing balance 25%;
- R&D capital allowance – 100% (first year).
R&D capital allowances can be a valuable deduction, for example:
- when the annual investment allowance has been exceeded;
- when an asset wouldn’t normally qualify for a 100% first year allowance (e.g. a company car used for R&D activities);
- when an asset wouldn’t usually qualify for capital allowances (e.g. a building or structure where part of the building will be used for R&D activities).
Qualifying expenditure
Staff costs – gross salary, employer’s NIC and employer’s pension contributions – that proportion of costs relating to qualifying direct and indirect activities. Some reimbursed staff expenses can also qualify.
Consumables – materials/items which are used up/transformed during the R&D process (and are not included in an end product that is sold).
Subcontractor costs (of which 65% of qualifying costs can be claimed) – only direct R&D activities qualify when paid to a third party; special rules apply under the RDEC scheme and for payments made to connected parties.
Externally provided workers (of which 65% of qualifying costs can be claimed) –for example, agency staff costs; Special rules apply for payments to connected parties.
Software costs – the proportion of costs relating to R&D activities.
Water, heat and light costs – the proportion of costs relating to R&D activities.
Subsidised/Subcontracted R&D
Subsidised/Grant-Funded R&D
Depending on the type of funding received, an R&D project may still qualify for R&D tax relief.
Where a government grant is received, the likelihood is that all associated qualifying project costs could go into an RDEC claim.
Where other funding is received, it is possible for the qualifying funded element of the costs to go in an RDEC claim and the qualifying unfunded element of costs to be included in an SME claim.
R&D project ‘subcontracted’ to an SME
It’s possible for an SME to make an RDEC claim for a project that has been subcontracted to it, if certain conditions are met.
Broadly, the project has to have been subcontracted by either a large company (for R&D tax relief purposes) or a person/business which does not have a trade chargeable to UK tax.