Research and Development tax credits

29 September 2017

The number of claims continues to rise. Have you claimed yours?

HMRC has just published the Research and Development tax credit data for 2015/16 and this shows an increase of 22% in the number of claims made by SMEs since the previous year.

There are currently two schemes: the SME scheme, and a scheme for large companies known as Research and Development Expense Credits (RDEC). The SME scheme applies to companies with fewer than 500 employees. Successful claimants are given enhanced tax relief of 130% on eligible expenditure. So for every £1 spent relief is claimed on £2.30. Companies who are not paying sufficient Corporation Tax to get the full relief can elect to have it wholly or partly paid to them in cash at a rate of 14.5% of the expenditure incurred.

In 2015/16 26,255 claims were made by 25,300 companies, an increase on 2014/15 of 19%. Claims by SMEs increased more markedly. Of the 26,255, 21,865 were made by SMEs, an increase of 22%. The total amount of R&D expenditure claimed by SMEs in 2015/16 was £4.6bn showing an increase of 25% on the previous year. In our region (Yorkshire and Humber) 1,500 SMEs made claims based on R&D expenditure totalling £60m.

Nationally most claims were made by the manufacturing sector (7,800), followed by Professional, Scientific and Technology (4,825) and Information and Communication (3,375).

The total amount of R&D support claimed rose to almost £2.9bn in 2015/16, an increase of £470m (20%) on the previous year.

The cost of support for the SME scheme rose to £1.3bn in 2015/16. This was partly due to the increase in the number of claims but also as a result of the increase in the enhancement rate to 130% (previously 125%). The cost of support for large companies was almost £1.5bn in 2015/16.

The total value of R&D expenditure against which claims were made was £22.9bn in 2015/16, an increase of 4% from the previous year.

There is a large discrepancy between the R&D expenditure incurred and the value of support granted. This is explained by a number of factors. Firstly, not all claims are successful and even schemes that are supported often contain a proportion of ineligible costs. Secondly, even with eligible costs being uplifted by 130%, the relief is given as reduction of Corporation Tax which was 20% last year, so the actual assistance is 46% of money expended.

Nevertheless, this is a very valuable relief. Since the scheme began in 2000/01, 170,000 claims have been made and tax relief to the value of £16.5bn has been granted. The scheme has become increasingly successful as awareness of it has grown. In fact it is estimated that in 2015/16 UK businesses spent £20.9bn on R&D, of which 99% was the subject of claims for tax credits. Three years ago only 77% was claimed.

Personally I find the estimate that 99% of R&D expenditure is claimed in tax credits hard to accept. I suspect that there are many SMEs who still fail to recognise R&D expenditure within their organisations and therefore omit to make claims. Consequently the total amount of expenditure is probably understated. Your company can claim tax relief if you have an R&D project which seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty. The activity must contribute directly to seeking the advance in science or technology or must be a qualifying indirect activity.

HMRC has issued guidelines to define the following terms:

  • project
  • advance in science or technology
  • science
  • technology
  • directly contribute
  • scientific or technological uncertainty

Costs that qualify for R&D tax relief

  • Employee costs
  • Staff providers
  • Materials
  • Payments to clinical trials volunteers
  • Utilities
  • Software
  • Subcontracted R&D expenditure
  • Capital expenditure

All of the above are subject to restrictions and qualifications and it is, of course, necessary to keep accurate records of funds and time expended on the project. But don’t let the bureaucracy put you off. If you would like one of our experts to review your business and give an opinion on whether you have a project that might be worth claiming for contact me at or your usual UHY adviser.