What qualifies for R&D tax credit: projects and costs

What qualifies for R&D tax credits?

A project qualifies when it seeks an advance in a field of science or technology by resolving scientific or technological uncertainty. Only companies chargeable to UK Corporation Tax can qualify. ^[1]

Whether a company may be able to look at claiming R&D tax relief depends on the project, the costs and the company. In practice, three questions decide the matter: does the project seek a real advance, were the costs of the right kind and paid, and is the company within the scope of the relief? Each is covered below, ending with the form the claim goes on.

Advances that count, and fields that do not

An advance may have physical consequences or may be an increase in overall knowledge; in either case, a competent professional working in that field would recognise it as an appreciable improvement. Appreciable improvement means changing or adapting the scientific or technological characteristics of something to the point where it is better than the original.

The improvements may include creating a process, material, device, product or service that increases overall knowledge or capability in the field. They may also include appreciably improving an existing one, for example to save costs or reduce waste, where the change is a genuine non-trivial improvement rather than a minor or routine upgrade, or using science or technology to copy the effect of a current one in a new or improved way.

The project has to aim at an advance in the overall field, not just for the business, although a process, product or service can still be an advance if another company has developed it but it is not publicly known or available. From 1 April 2023, mathematical advances can be treated as science for these purposes. An advance sought in the arts, humanities or social sciences, including economics, cannot be claimed.

Showing that the uncertainty was genuine

A scientific or technological uncertainty exists when an expert on the subject cannot say if something is technologically possible, or how it can be done, even after referring to all the available evidence. This means neither the company nor experts in the field can already know about the advance or the way to solve it.

A company needs to be able to explain the work it did to overcome the uncertainty, and this can be a simple description of the successes and failures during the project. It should also explain why a professional could not easily work out the advance, which can be shown through other attempts to find a solution that had failed.

The people working on the project can help too. Showing that they are professionals in that field, and having them explain the scientific or technological uncertainties involved, is another way to support the case.

Which R&D expenditure is eligible?

Costs count only from the start to the end of the project. R&D starts when work begins to resolve the scientific or technological uncertainty and ends when that uncertainty is resolved, or the work to resolve it stops. A cost has to have been paid already to be claimed, and costs that have not been paid before the claim is made are not eligible. ^[2]

Allowable costs can relate to direct R&D activity and to qualifying indirect activities, which are tasks that form part of the project but do not directly contribute to the resolution. Examples of qualifying indirect activities include preparing the original R&D findings report, maintenance, and feasibility studies to inform the strategic direction of a specific R&D activity. Data and cloud computing costs that are for qualifying indirect activities cannot be claimed.

Only the costs listed in the guidance can be claimed, and capital expenditure is one example of a cost that cannot. The guide to working out the relief covers the cost categories and how they feed into the calculation.

Staff costs can include the time staff spend on the R&D project, and a proportion of the cost of staff who support the project, but a company cannot claim 100% of the cost of a staff member who has other duties. Software licence fees can count, along with a reasonable share of the costs of software partly used in R&D activities.

Conditions a company has to meet to claim

There are 4 different types of R&D tax relief, and which one applies depends on when the accounting period began. For accounting periods beginning before 1 April 2024 the schemes are RDEC and SME tax relief, and for accounting periods beginning on or after 1 April 2024 they are the merged scheme and enhanced R&D intensive support (ERIS). ^[3]

For an RDEC claim on an accounting period that began before 1 April 2024, the company must be trading, be chargeable to Corporation Tax, have a project that meets the definition of R&D and have costs that qualify for the relief. ^[4]

The guide to the RDEC scheme covers the merged scheme's rates and how its credit is taxed and paid out.

For accounting 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 the tax relief, so scheme eligibility needs a separate check.

Which form the R&D credit goes on

R&D tax relief is claimed on the Company Tax Return. The supplementary form CT600L is used when a company is claiming Research and Development Expenditure Credit or the Research and Development SME Payable Tax Credit for small and medium-sized enterprises. ^[5] Under ERIS, the CT600L is completed if the company is claiming a payable tax credit.

Form CT600 can be used to file a Company Tax Return by post if it cannot be filed online. The guide to claiming for earlier years covers notification and timing for the claim.