R&D tax credits: who can claim and how they are paid

R&D tax credits are a tax relief that supports UK companies working on innovative projects in science and technology. GOV.UK says Research and Development relief supports that work, and for accounting periods beginning on or after 1 April 2024 it is delivered through two schemes.

The relief is delivered through your Company Tax Return, not as a grant. It either reduces your Corporation Tax or, in some cases, is paid to the company in cash, depending on the scheme and your tax position. It is not a loan and nothing is repaid, but a claim that should not have been made can carry a penalty.

Capzy does not give tax advice. Whether your work qualifies is a technical judgement, so involve an accountant or specialist adviser before you claim.

Only companies chargeable to UK Corporation Tax can claim, which means sole traders and partnerships cannot. The company must also have a project that meets the definition of R&D, and for the merged scheme it must be trading.

Size matters only for the second scheme. Enhanced R&D intensive support, known as ERIS, is open to loss-making R&D intensive small and medium-sized enterprises. Profit-making companies and SMEs that are not R&D intensive claim under the merged scheme instead.

If a contractor does R&D on behalf of a customer, GOV.UK says that for periods beginning on or after 1 April 2024 only the company that makes the decision that R&D needs to be carried out can claim. Contractors can claim only where they can show they made that decision and planned the work.

A project qualifies when it seeks an advance in a field of science or technology by resolving scientific or technological uncertainty. GOV.UK defines the uncertainty as something an expert in the field cannot say is possible, or how it can be done, even after looking at the available evidence.

• The advance must be in the overall field, not just new to your own business.
• It must be an appreciable improvement, more than a minor or routine upgrade.
• A competent professional in the field would recognise it as an improvement.
• You must be able to explain the work you did to overcome the uncertainty, including failed attempts.
• Advances in the arts, humanities and social sciences, including economics, do not count.

From 1 April 2023 mathematical advances can be treated as science for these purposes. Ordinary product development that applies known methods generally does not meet the test, which is why records of the technical problem and how you tackled it matter.

You can claim costs that relate to the R&D itself and to qualifying indirect activities, as long as you have already paid them. GOV.UK says costs not paid before the claim is made are not eligible.

Costs for work that would have been done anyway, such as routine payroll management, and redundancy payments cannot be claimed. Where staff split their time, you claim only the proportion spent on the project: 90% of a salary if someone spends 90% of their time on R&D.

The merged scheme gives a taxable credit of 20% of qualifying costs, while ERIS lets a loss-making R&D intensive SME deduct more and claim a payable credit. HMRC says these two schemes replace the old RDEC and SME schemes for accounting periods beginning on or after 1 April 2024.

You can choose the merged scheme even if you are eligible for ERIS, but you cannot claim under both for the same expenditure. In either scheme the credit you receive in a period cannot exceed the PAYE cap, which is £20,000 plus 300% of the company’s relevant PAYE and National Insurance liabilities, unless you are exempt. Under the merged scheme any excess carries forward to the next period.

The merged scheme credit is used first to pay the company’s Corporation Tax for the period, and only what is left over is worked through further steps and paid. HMRC’s claim guidance sets out the order: first your current Corporation Tax liability, then a comparison with the net credit claimed, then a comparison with PAYE and National Insurance or the PAYE cap.

A company with little or no Corporation Tax to pay has less to set the credit against, so what is paid depends on the later steps and the PAYE cap. For ERIS, the payable credit is claimed by giving up the loss. In both cases you give bank details in the return so that HMRC can make a payment.

Because the money arrives after the work, and after a return is filed, plan your cash flow forecast without counting on a claim until it is accepted. Our guide to paying Corporation Tax explains the tax the credit is first set against.

You make a claim on your Company Tax Return, after sending HMRC two pieces of information first. The steps below follow HMRC’s guidance for claims for accounting periods beginning on or after 1 April 2023.

• Claim notification: a first-time claimant, or one whose last claim was more than 3 years earlier, must submit a claim notification form within the claim notification period, which ends 6 months after the end of the period of account. Without it the claim is invalid.
• Additional information form: submit it before, or on the same day as, the Company Tax Return, and send the form first. If the return goes in before it, the claim is rejected.
• The return: tick the boxes to confirm both forms were sent, include bank details and complete the supplementary page CT600L.
• The deadline: for a period of account of 18 months or less, 24 months from the last day of that period.

SMEs claiming for the first time may also be able to apply for HMRC’s advance assurance service, which checks the details of your work before you claim. HMRC says the targeted version is a pilot that runs until May 2027.

Yes, companies with a registered office in Northern Ireland that claim ERIS must follow special Northern Ireland provisions, with an option to opt out in some cases. HMRC has a separate guidance page for it, and the opt-out is made on the additional information form when you claim.

Local support for innovation is a separate matter, covered in our guide to business grants in Northern Ireland. Grants and tax relief can interact, so tell your adviser about any grant income when you prepare a claim.

Capzy is a credit broker, not a lender, and is paid by the lender. We do not prepare or submit R&D claims and cannot say whether your project qualifies, so use an accountant or specialist for that.

If a development project needs funding before any credit arrives, we can introduce a business to lenders, subject to status and lender criteria. Equipment can be funded through asset finance, and you can check your funding options with a soft search that does not affect your credit score. Any lender offer costs interest and fees, and a claim that is not accepted would not repay it.