Detailed guide: Research and Development tax relief for small and medium-sized enterprises

Updated: The date to make amended claims for reimbursed expenses has been changed from 31 January 2018 to 30 April 2018.


SME R&D relief allows companies to:

  • deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction
  • claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss

To claim the relief you need to be a SME and show how your project meets our definition of R&D.

Companies who are making their first R&D claim can qualify for Advance Assurance. If Advance Assurance is granted, any R&D claims in the first 3 accounting periods will be accepted if they’re in line with what was discussed and agreed.

You also can find information about this relief in our ‘Making R&D easier for small companies guide’.

Companies that can claim relief

You can claim R&D tax relief if you’re a SME with:

  • less than 500 staff
  • a turnover of under €100m or a balance sheet total under €86m

If your company has external investors, this can affect your SME status. You may need to include the figures of linked companies and partner companies when you work out if you’re a SME.

You can’t claim SME R&D relief if the project is already getting notifiable state aid or you’ve been subcontracted by another company. However, you may be able to claim the Research and Development Expenditure Credit (RDEC).

Linked companies

The staff, turnover and balance sheets of any linked companies should be included in your total. Your company is linked if:

  • it holds over 50% of the voting rights in another company
  • another company holds over 50% of the voting rights in your company

Partner companies

You have a partner company if:

  • another company holds over 25% of your voting rights or capital
  • you hold over 25% of another company’s voting rights or capital

You need to include a proportion of the staff, turnover and balance sheets of partner companies. This should be based on the percentage of voting rights and capital that connects the 2 companies. For instance, if you own 30% of another company you should include 30% of its staff, turnover and balance sheets when calculating if you’re a SME.

Costs you can claim

You can claim certain costs on the project from the date you start working on the uncertainty until you develop or discover the advance, or the project is stopped.

Staff costs

For staff working directly on the R&D project, you can claim a proportion of their:

  • salaries
  • wages
  • Class 1 NICs
  • pension fund contributions

You can claim for administrative or support staff who work to directly support a project. For example, human resources used to recruit a specific person to work on the project. You can’t claim for clerical or maintenance work that would have been done anyway like managing payroll.

You can claim 65% of the relevant payments made to an external agency if they provide staff for the project.

If you made a claim by following the ‘Reimbursed expenses clarification raised in the R&D Consultative Committee meeting’ note issued by HMRC to the Research and Development Consultative Committee on 8 October 2014, you can make an amended claim for reimbursed employee expenses.

You can claim by following the procedure shown in section CTA09/S1123 of the Corporate Intangibles Research and Development Manual (CIRD) 83200 manual.

You can only make an amended claim for reimbursed expenses in this way until 30 April 2018.

Subcontractor costs

You can claim 65% of the relevant costs of using a subcontractor for your R&D activities.

Consumable items

You can claim for the relevant proportion of consumable items used up in the R&D. This includes:

  • materials
  • utilities

Costs that can’t be claimed

You can’t claim for:

  • the production and distribution of goods and services
  • capital expenditure
  • the cost of land
  • the cost of patents and trademarks
  • rent or rates

Work out when the R&D activity starts and ends

The R&D activity starts when you begin working to resolve the uncertainty. You’ll need to identify the technical issues that need to be resolved, and make sure there isn’t an existing solution that has already been worked out.

The R&D activity ends when you solve the uncertainty or stop working on it. The activity you claim R&D relief for should end once you have a working prototype that solves the problem, and before you go into production.

Your R&D may restart if you find another scientific or technological uncertainty after you’ve started producing the product. If this happens, you can claim for further R&D while you try to resolve it.

How to claim R&D relief

You can make a claim for R&D relief up to 2 years after the end of the accounting period it relates to.

You can claim the relief by entering your enchanced expenditure into the full Company Tax Return form (CT600).

To calculate your enhanced expenditure you need to:

  1. Work out the costs that were directly attributable to R&D.
  2. Reduce any subcontractor or external staff provider payments to 65% of the original cost.
  3. Add all costs together.
  4. Multiply the figure by 130% to get the additional deduction to put in to your tax computations.
  5. Add this to the original R&D expenditure figure to get the enhanced expenditure figure which you can enter into your tax return.

If you make a trading loss, you can chose to surrender this and claim a tax credit. You can find out how to convert tax relief into payable tax credits in the Corporate Intangibles Research and Development Manual.

How to support your claim

You can add the details of your claim when you submit your return.

It will help your claim if you give us a short summary that explains how your project:

  • looked for an advance in science and technology
  • had to overcome uncertainty
  • overcame this uncertainty
  • could not easily be worked out by a professional in the field

You can also show a breakdown of your total costs and how they were apportioned to the R&D project, for instance the percentage of total staff costs or utility costs used. You can also show that subcontractor or external staff payments were reduced to 65%.

Source: HMRC

Policy paper: Making Tax Digital

Updated: Updated to reflect current policy position and timescales.

There is widespread agreement that Making Tax Digital for Business is the right approach for the future. However a number of concerns about the pace and scale of change have been raised. As a result the government has announced that the roll out for Making Tax Digital for Business has been amended to ensure businesses have plenty of time to adapt to the changes.

Businesses will not now be mandated to use the Making Tax Digital for Business system until April 2019 and then only to meet their VAT obligations. This will apply to businesses who have a turnover above the VAT threshold – the smallest businesses will not be required to use the system, although they can choose to do so voluntarily.

The government remains committed to ensuring we can deliver a modern digital tax system for all businesses and their agents, supporting them to get their tax right and reducing the amount of tax lost through avoidable error.

Helping businesses, self-employed people and landlords get it right first time

The majority of customers want to get their tax right but the latest tax gap figures (2014/15) show too many find this hard, with a cost to the Exchequer of over £8 billion a year due to avoidable taxpayer mistakes. In 2014/15 over £3.5 billion of revenue was lost due to these mistakes in VAT returns alone.

A modern tax system, based on digital technology will make it easier for businesses to get their tax right. Reducing the amount of avoidable errors will also reduce the cost, uncertainty and worry that businesses face when HMRC is forced to intervene to put things right.

The logic of digitising the tax system is widely recognised and millions of businesses are already banking, paying bills, and interacting online. Digitising routine business tasks such as record keeping is the next step and is one many businesses have already taken.

The first businesses have already started keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital service for income tax and NICs and we will continue to expand this pilot.

Businesses will not now be mandated to use the Making Tax Digital System until April 2019 and then only to meet their VAT obligations. This will apply to businesses who have a turnover above the VAT threshold – the smallest businesses will not be required to use the system, although they can do so voluntarily.

Our overview of Making Tax Digital contains more detail on our plans.

Digital support

HMRC already provides a wide range of digital services and support for businesses and the self-employed. For example, over 1 million small businesses accessed HMRC’s digital help and support last year. Transforming the experience for small business explains the types of digital support available.

Smarter experience for individuals

The Personal Tax Account brings together each individual customer’s information in one online place. It allows customers to access the service from a digital device of their choice and at a time that suits them. It allows them to register for new services, update their information and see how much tax they need to pay.

Log-on to your personal tax account – it only takes a few minutes

HMRC is working closely with third parties to explore how more effective use of third party information can contribute to the modernisation of the tax system. This will mean customers never have to tell HMRC about information it already has. This was considered during the formal consultation period.

In 2017, we will start to use PAYE information to make in-year adjustments to customers’ tax codes in real-time. This will avoid both under and overpayments from occurring by the end of the tax year. Customers will be notified when the right tax is not paid and, through their Personal Tax Account, HMRC will provide a clear explanation of how the tax has been calculated.

Source: HMRC