What are research and development tax credits?

Question

Accepted Answer

Here is a comprehensive overview of UK Research and Development (R&D) tax credits, drawing on the available sources:

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## What the law says

R&D tax credits are a **corporation tax** relief regime. The legislation is primarily found in **Part 13 of CTA 2009** (additional relief for expenditure on R&D) and **Chapter 6A of Part 3 of CTA 2009** (R&D expenditure credits).

There are two main schemes:

### 1. SME Scheme (Part 13, Chapter 2 CTA 2009)
This relief is available to **small or medium-sized enterprises (SMEs)** for expenditure on:
- **In-house direct R&D**, or
- **Contracted-out R&D**

where the cost is incurred by the company.

The reliefs available under the SME scheme are:
- An **additional deduction** under s.1044 CTA 2009 (in calculating the profits of the trade), or
- A **deemed trading loss** under s.1045 CTA 2009.

Crucially, the SME scheme also provides for the payment of **R&D tax credits** (a cash payment) where a company obtains relief under Chapter 2 **and** makes, or is treated as making, a **trading loss**.

The qualifying expenditure ("qualifying Chapter 2 expenditure") is defined in s.1051 CTA 2009.

### 2. R&D Expenditure Credit (RDEC) — Large Companies (Chapter 6A, Part 3 CTA 2009)
Finance Act 2013 introduced the **RDEC** as a stand-alone credit for large companies, brought into account as a **taxable receipt** in calculating trade profits. The large company scheme was abolished from 1 April 2016, with RDEC replacing it.

Recent legislation has also extended relief to cover expenditure on **data and cloud computing services** and updated the administration of claims.

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## HMRC guidance / practice

### SME Scheme
An SME company may claim an **additional deduction of 130%** of qualifying expenditure incurred on R&D where the R&D is related to a trade which that company carries on or subsequently commences. This additional deduction may also be claimed where an SME makes a qualifying payment to a **subcontractor** to carry out the R&D on its behalf.

For example, where an SME has a trading loss, it can surrender enhanced expenditure (230% of qualifying spend) for a **payable tax credit at 14.5%** (for pre-April 2023 expenditure).

### RDEC Scheme
- RDEC is given to **large companies** carrying out qualifying R&D (Chapter 6A, Part 3 CTA 2009).
- The credit is a **fixed percentage** of qualifying R&D expenditure.
- For **profit-making companies**, the RDEC discharges corporation tax liability.
- Companies with **no corporation tax liability** benefit through either a **cash payment** or a reduction of tax or other duties due.
- From **1 April 2016**, large companies claiming R&D relief must do so via RDEC. SMEs may also claim RDEC in certain circumstances (e.g. where their expenditure is subsidised and therefore excluded from the SME scheme).
- A large company **cannot generally claim** expenditure on **subcontracted R&D** as qualifying expenditure under RDEC, but can claim contributions to **independent research** subject to certain conditions.
- All R&D claims from **1 April 2023** are subject to updated claims process requirements.

### Where to find detailed guidance
HMRC's detailed guidance on the R&D tax credits regime is in the **Corporate Intangibles Research and Development Manual (CIRD) at CIRD80000**.

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> **In summary:** R&D tax credits are a corporation tax incentive for companies investing in innovation. SMEs benefit from an enhanced deduction (and potentially a payable cash credit if loss-making), while large companies claim the RDEC — a taxable but cashable credit — both based on qualifying R&D expenditure.

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