Research and development (R&D) tax credits

The UK Government recognises that encouraging innovation is a vital component in a strategy for improving the UK’s productivity, performance and competitiveness. As a result, the research and development (R&D) incentives for both small and medium size enterprises (SMEs) and large companies have been enhanced in recent years to encourage and reward greater innovation in the UK. More information on how these incentives work is detailed below.

What this means for small companies

The R&D tax credit available to small and medium enterprises (SMEs) is a 186% super-deduction with the cash back available to loss making SMEs being c18.6% of the qualifying expenditure.

The cash value of claims for tax paying companies is c£21.50 for every £100 of R&D spend (based on a 25% tax rate) and c£18.60 for companies with losses.

What this means for large companies

The large company regime, the Research and Development Expenditure Credit (RDEC) was introduced from 1 April 2013.

RDEC allows larger companies to recognise the benefit of their R&D claim effectively as a grant against cost, opposed to within the tax line, which helps add visibility. Loss makers can also claim cash back from HMRC.

From April 2023, the credit rate increased to 20% (from 13%), providing a net cash benefit of 15% at a 25% tax rate. RDEC is payable regardless of the tax position of the company, subject to some restrictions including a cap based on PAYE and NI.

Examples of how we have helped our clients

A large technology business

Whilst the clients team continued to develop and innovate new products, we helped implement a system that minimised the effort required to capture the qualifying R&D activity and associated expenditure so that the claim for R&D relief was maximised.

An automotive investor

We helped develop and agree an R&D claims process for our client. This was agreed with HMRC. The process effectively fixed the typical R&D percentage for each development function, depending on the type of project/programme being undertaken. HMRC agreed that the percentages need only be revisited every few years. This has automated the process enabling future claims to be carried out in-house.

A global engineering company

R&D projects covered Environmental Control (Air Systems), Life Support, Hydraulics, and Electronic Control & Data Systems. As a large number of projects were undertaken each year we used a categorisation process which the company could run in-house in future periods. Claims have been agreed by HMRC for many years without any issues.

A small technology company

This business had an extensive R&D programme and needed to understand the interactions of claiming the SME R&D credit with claiming grants and other funding. We advised them on these issues and helped the company claim a cash credit of over £2 million for one year.

A large pharmaceutical company

We advised the group on the R&D regimes and grants available across the world to help them understand the optimal locations for their R&D operations.

Contact us

Rachel  Moore

Rachel Moore

Partner, R&D and patent box specialist, PwC United Kingdom

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