What is R&D tax credit and how do UK startups claim it?
Short Answer
UK companies claim R&D tax relief on qualifying R&D spend through their corporation tax return. Under the merged scheme the expenditure credit is 20% and taxable, so the net benefit depends on the company's tax position.
Full Explanation
UK companies claim R&D tax relief on qualifying R&D spend through their corporation tax return. Under the merged scheme the expenditure credit is 20% and taxable, so the net benefit depends on the company's tax position.
For accounting periods beginning on or after 1 April 2024, the merged R&D expenditure credit (RDEC) scheme and enhanced R&D intensive support (ERIS) replace the old SME and RDEC schemes. The relief is administered by HMRC and is open to profitable and loss-making companies. Qualifying costs include staff costs for people working on the R&D, software, data and cloud computing costs used in it, consumable materials, and some subcontracted R&D; general running costs, customer support, routine IT maintenance and commercialisation do not qualify. HMRC's guidance sets the detailed rules, including the restrictions on overseas costs.
How the relief arrives depends on the company. Under the merged scheme, a company with £200,000 of qualifying costs generates a £40,000 expenditure credit. Because the credit is taxable, the benefit after tax is less than 20% of the costs: a profitable company sets it against its corporation tax, and a loss-making company may receive it in cash after a notional tax deduction. A loss-making SME that is R&D intensive, with qualifying R&D spend at least 30% of its total expenditure, can claim ERIS instead: an extra 86% deduction on qualifying costs, with a payable credit of up to 14.5% of the surrenderable loss. Which route applies, and what it is worth, turns on the company's own tax position.
Claims are made with the annual corporation tax return and supported by records of the development activities, staff time and costs claimed. Every claim needs an additional information form, and a company claiming for the first time, or after a gap, must notify HMRC in advance. HMRC has increased its scrutiny of R&D claims, so accurate records and advice from an accountant familiar with R&D relief matter. This is general information, not tax advice; check HMRC's guidance on the merged scheme and ERIS for the current rules.
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