R&D tax credits: The ultimate guide for 2022
How do R&D tax credits work? Are you missing out on tax relief? Find out how to claim back up to 33% of your R&D spend.
The Research and Development Expenditure Credit scheme, RDEC (‘R-deck’) for short, gives companies relief on their Corporation Tax for innovative projects which meet the scheme’s definition of ‘research and development’.
The tax credit for RDEC is 13% of your company’s qualifying R&D expenditure.
In this post, we’ll explain how the RDEC scheme works, what you can claim for and how we can help.
All sorts of companies can claim R&D tax relief with the RDEC scheme – if you’re researching or developing an advance in your field, whether that’s fintech or food, energy or engineering, then it’s financially worth your while to find out if you’re eligible.
Your R&D must be in science and/or technology. In the changes to R&D tax credits coming in from April 2023, R&D in pure maths will qualify for the first time – this is great news if your startup works with, for example: AI, quantum computing, risk analysis or algorithms.
So, your company’s work appears to be in the right sector, but what projects count as R&D?
When you apply for tax relief from the RDEC scheme, you’ll need to write a Technical Narrative to explain how your project meets these criteria:
If you’re researching something different from what your company usually does, you might be able to claim R&D tax relief. The project must relate to your company’s current trade or to a trade that you intend to start up based on the results of the R&D.
The type of R&D tax relief you might be eligible for depends on the size of your company, if you had a grant for the work, and if you’re working on the project as a subcontractor:
Good news for startups: the SME scheme is more generous than RDEC – you can claim tax relief worth up to 33% of your R&D spend. For this scheme, you’ll be considered an SME if you:
If your company doesn’t fit the definition of an SME (see above), then you might be able to claim using the RDEC scheme.
You can also claim from the RDEC scheme if your company is a SME but you don’t qualify for SME R&D relief because one or all of these apply:
The amount of tax relief is one of the main differences between the RDEC and SME R&D tax relief schemes – for the SME scheme, the relief is much more generous.
If you qualify for RDEC tax relief, the credit you’ll get is 13% of your company’s qualifying R&D expenditure. The amount you get is taxable as trading income.
Usually, the credit is used against your Corporation Tax. Sometimes, the credit is used against a company’s other tax liabilities. And occasionally, for example if the company is loss-making, the relief is paid in cash by HMRC. Below we explain the 7 steps – how HMRC works out how to apply your tax credit.
Here’s our easy-to-understand guide to the RDEC 7 steps. Use these steps to work out how your company will get your RDEC R&D tax credit. The principle here is that you use the credit to pay off any tax your company owes HMRC – only when that’s settled would you get a cash payment from HMRC.
Your accountant or tax advisor will use these steps in this order to set out your tax credit in your company tax return:
There’s more about how to apply the tax credit on the gov.uk website.
If you successfully claim tax relief under RDEC, it won’t count as state aid.
If your company got a state aid grant for your R&D project – for example, an Innovate UK grant – you can’t claim R&D tax relief under the SME scheme, even if you meet the other criteria as a small business. This is because, unlike the RDEC scheme, the SME R&D scheme counts as state aid and you’re not allowed to receive state aid twice for the same project.
There are strict criteria for ‘qualifying expenditure’ for RDEC.
Here’s what you can and can’t claim for:
✅ Employees working directly on the R&D project
You can claim the appropriate proportion of their salaries or wages, bonuses, Class 1 National Insurance and contributions to their pension. Similarly, you can claim for admin or support staff whose work directly supports the R&D project.
✅ Agency or group staff working directly on your R&D project
You can claim up to 65% of the payments you make to an agency for staff, and/or up to 100% of the cost of staff from another company in the same group as your company.
❌ Clerical or maintenance staff
You can’t claim for work that would have been done anyway, such as payroll, accounting, marketing and legal.
Whether you can claim for subcontractor expenses depends on who the contractor is. You can claim for 65% of subcontractor costs if the work is done by:
You can claim for consumables – materials and utilities that you use up in the R&D project, such as electricity and water.
You can claim some costs for programs and systems you use for the R&D project such as CAD and CAM software and services such as GitHub. The amount you can claim is the proportion you use the software for the R&D project. The rules for software ‘apportionment’ are set out in this guidance from HMRC.
❌ Producing, storing and distributing goods and services
❌ Land, rent or rates
You can’t claim the cost of land, your rent or business rates on your properties.
❌ Patents and trademarks
❌ Capital expenditure
You can’t claim under RDEC for things you buy that have enduring value and you can use beyond your R&D project, for example: vehicles, machinery or equipment.
You can claim costs on your R&D projects from the date you start working on the problem until you develop the advance – you’ve solved the technological uncertainties – , or the project ends or stops.
The government defines the ‘end’ of your R&D as when you have a working prototype and before you go into commercial production. Market research, marketing and commercial testing doesn’t qualify as R&D activity. You might have to stop the project before it gets that far – and you can still claim for the R&D even if the project was ultimately unsuccessful.
So when should you claim? And what happens if your R&D is ongoing? For RDEC, you’ll need to make your claim in the two years after the end of the accounting period in which you were spending on the project. If your R&D is ongoing, that’s fine – you’ll need to submit separate claims for each accounting period.
You can claim RDEC tax relief online by entering your R&D costs in your company tax return. You’ll need to submit extra information to support your claim: the Technical Narrative. There are full details about what you need to submit at the gov.uk website.
Here’s an example of how to work out the amount you can claim with the RDEC scheme. You – or your accountant or tax advisor – will need to do this calculation to enter the amount in your company tax return to show how much tax relief you’re claiming.
1. Work out your R&D costs
Add up how much you spend in each category of the qualifying expenditure, and work out how much you can claim:
2. Total up your costs
3. Multiply by 0.13
The tax credit you could receive is 13% of your allowed R&D costs:
£225,250 x 0.13 = £29,282.50
£29,282.50 is the amount you enter on your tax return as your R&D tax credit.
At SeedLegals, we’re big fans of the R&D tax relief scheme because it can be a source of a very useful cash boost for startups. Before a company is profitable, the team burns through money developing products or services – money back from HMRC means founders and their teams can keep working for longer without having to find investors.
We also align with the spirit of the R&D tax relief schemes. The government designed the schemes to encourage and reward innovation in the UK. This consistent endorsement for over a decade shows how valuable our startup ecosystem is to the country.
We’ve helped hundreds of small businesses prepare their claim for R&D Tax Credits. Our team of experts know how to prepare winning claims – in 2022, the average claim awarded to our customers was an impressive £42,000. Just think what you could do with that amount of cash.
Got questions about RDEC or R&D Tax Credits for startups? Book a free call with one of our experts: