R&D tax relief for SMEs in UK: How to claim and what qualifies

In this article, we will understand how these R&D tax reliefs work for SMEs, the eligibility criteria and how to claim them.

What are R&D tax reliefs?

R&D tax reliefs are a specific government incentive for businesses investing in R&D. As per HMRC an R&D project qualifies only if it seeks an advance in overall science or technology through the resolution of scientific or technological uncertainty that could not readily be resolved by a competent professional. The rules allow profitable companies to usually benefit from additional corporation tax deductions for qualifying R&D spend, reducing the taxable profits or in cases of a loss making firm, possibly allowing it to surrender some of the R&D generated loss for a payable tax credit.

Previously, these credits were available in two different schemes -

• SME Scheme for small and medium-sized enterprises
• R&D Expenditure Credit (RDEC) for large companies and certain SMEs

Since 1 April 2024, both schemes have been merged into a single entity called the merged R&D expenditure (merged scheme), along with the introduction of a new Enhanced R&D Intensive Support (ERIS) for R&D-intensive companies. The ERIS is a separate relief for loss making SME firms that spend at least 30% of their companies total expenditure on qualifying R&D, eligible companies may then be able to claim an enhanced deduction and a more generous payable credit than that available instead of using the merged scheme.

What activities qualify for R&D tax relief claims?

The qualifying R&D activities for this relief claim include

• New product developments or improvements to current production
• Engineering and software development
• Enhancing manufacturing processes
• Technical problem solving for uncertain outcomes

Which businesses can claim R&D tax relief?

Limited companies that are engaged in active product development or innovation can claim the SME R&D tax relief by following the HMRC guidelines that require the following;

• The company must be subject to Corporation Tax. This means that sole traders and partnerships cannot claim this relief.
• There must be qualifying R&D work to substantiate the claim for relief.
• Receipts of costs incurred under the expenses allowed for R&D purposes should be readily available.
• All HMRC rules about R&D claim eligibility must be met.

What are the costs that can be included in an R&D claim?

Several project-related costs can be claimed by businesses eligible for the relief. These include;

• Salaries, NI and pension contributions for staff directly involved either full-time or part-time in R&D activities.
• Payments to subcontractors for qualifying R&D activities, with specific restrictions on overseas subcontractors.
• Hiring externally provided workers (EPWs), such as freelancers or agency costs for specialised R&D work.
• Purchase of software licences or other consumable materials and utilities required for R&D.
• Payments for carrying out clinical trials and collaborating with research organisations.

How can R&D tax credits be claimed?

R&D tax relief or credits need to be claimed as part of your company’s annual Corporation Tax return (CT600). For this, companies may need to provide additional supporting documents, such as pre-claim notifications or an Additional Information Form (AIF), if required.

1. Pre-claim notification

Limited companies or SMEs claiming R&D relief for the first time, or after three years since their last claim, must submit a pre-claim notification to HMRC. This notification must be submitted within six months of the end of the accounting period. Missing this deadline will make the claim void.

2. Additional Information Form (AIF)

Before filing the Corporation Tax return, companies must submit a mandatory AIF to claim R&D credits. The form will include the following:

• A detailed, category-wise breakdown of all the qualifying expenses.
• A proper description of each R&D project, including the scientific or technological goal pursued, the uncertainty associated with it and how that has been addressed.
• Relevant details about the competent project managers.
• Details about the agent or adviser preparing the claim.

Common mistakes to avoid when claiming R&D tax relief/credits

In recent years, HMRC has increased its scrutiny over claims to ensure relief and credits are awarded only to genuine companies that meet all the qualifying and eligibility criteria. The most common pitfalls to avoid when making R&D claims are;

• Including routine product development or commercial improvements as R&D, and claiming costs that don’t meet the technical requirements of HMRC.
• Missing pre-claim notifications and submission deadlines.
• Not providing sufficient documentary evidence of the detailed project, such as its technical uncertainty and the problem it has solved.
• Selecting an agent with poor documentation processes who works on a percentage commission basis with minimal accountability for challenged claims.

How Abbott & Brown helps with R&D tax credit claims

Preparing R&D tax relief and credit claims for SMEs requires in-depth technical knowledge about HMRC processes and Corporation Tax filing. At Abbott & Brown, we work with companies across different sectors where R&D is an integral part of business and future growth. Our experts can help identify qualifying activities and accurately calculate the allowable expenses to support your claim fully.

Our ICAEW and ACCA-certified chartered accountants help limited companies maximise their Corporation Tax relief by backing up returns and claims with full compliance as mandated by HMRC.

If your company is heavily invested in R&D and is looking to claim the right amount of tax relief, you can book a free consultation with our team today.

FAQs

Q1. What qualifies as R&D for tax purposes?

As per the guidelines set out by HMRC, companies investing in the development of new products and software, which must seek an advance in science or technology by solving an uncertain technical or scientific problem that no other competent professional has solved yet, qualify for R&D tax relief and credits.

Q2. Can small businesses claim R&D tax credits?

R&D tax credits are a Corporation Tax relief, and only companies chargeable to UK Corporation Tax are eligible to claim them.

Q3. What expenses can be included in the R&D credit claim?

The salary and pensions paid to staff directly involved in R&D activities, payments to UK subcontractors, costs of hiring externally provided workers (EPWs), purchasing software licences and carrying out clinical trials are all expenses that can be included in the R&D credit claim.

Q4. Do I need an accountant to submit R&D tax credit claims?

While it is not mandatory, R&D tax credit claims are complex and can require extensive documentation, such as pre-claim notification and Additional Information Forms (AIF). Since these claims must be submitted with the Corporation Tax Return, hiring a professional accountant with expertise in this area is always recommended.

Q5. What potential credits are available via the Enhanced R&D Intensive Support loss-making R&D intensive SMEs entitled to:

If your business is a loss-making SME that carries out intensive (R&D), you may be eligible for ERIS. This scheme provides additional tax relief by allowing you to claim a total deduction of 186% of your qualifying R&D costs. If your company is making a loss, you may also be able to surrender that loss in exchange for a tax-free payable credit of up to 14.5%, helping to improve your cash flow while you continue investing in innovation.

Example:

A loss-making, R&D-intensive SME spends £100,000 on qualifying R&D activities during the year.

Under Enhanced R&D Intensive Support, the company can:

• Claim a total tax deduction of £186,000 (£100,000 standard deduction plus an additional £86,000 enhanced deduction).
• If the company has a surrenderable loss, it may be able to claim a tax-free payable credit of up to £26,970 (14.5% of the £186,000 surrenderable loss).

This means that for every £100,000 of qualifying R&D expenditure, an eligible company could receive up to £26,970 in cash through the enhanced relief, subject to the scheme's qualifying conditions and any applicable limits.

This example assumes the full £186,000 is available as a surrenderable loss. In practice, the amount of payable credit depends on the company's taxable position and the amount of surrenderable loss available.

Q6. What are expenses that cannot be claimed?

Common expenses that clients incorrect assume they can claim are:

• claiming cosmetic improvements
• claiming market research
• claiming routine software updates