R&D tax relief is often misunderstood. Many companies assume it only applies to high-tech or scientific work, when in fact, a wide range of industries carry out eligible activity without realising it.
If your business is overcoming technical challenges, improving processes, or building something new or more efficient, there may be a claim worth exploring. You don’t need to be in a lab or have a formal R&D department. What matters is whether the work involves a level of uncertainty that skilled professionals cannot easily resolve.
The rules have changed in recent years, and eligibility now depends on several factors including company size, funding sources and the accounting period in question. That’s why it pays to get expert advice early on.
If you external funding, we can help you with your grant audit.
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What is the R&D Tax Relief Scheme?
The UK R&D Tax Relief Scheme is a government incentive administered by HMRC to encourage companies to invest in scientific or technological innovation. It is legislated under Part 13 of the Corporation Tax Act 2009 and guided by the BEIS Guidelines. The scheme seeks to enhance UK productivity and competitiveness by supporting businesses that undertake qualifying R&D activities. It does so by reducing tax liabilities or offering cash credits, thereby offsetting some of the financial risks inherent in R&D work.
The relief is designed to reward genuine attempts to resolve scientific or technological uncertainties such as challenges that competent professionals cannot easily resolve using existing knowledge. To qualify (assuming the company is a going concern, has a relevant trade and subject to UK corporation tax), companies must aim to make an advance in a field of science or technology and undertake systematic investigation to overcome those uncertainties.
The scheme explicitly excludes routine improvements, pure aesthetic changes, readily deductible bespoke work, focusing instead on work that contributes materially to the advancement of overall knowledge or capability in a given field.
The UK R&D tax relief landscape has undergone significant reform in recent years, introducing additional complexity to the regime. As a result of these changes, companies must now navigate a more nuanced framework where eligibility and the applicable scheme depend on several key variables. These include but not necessarily limited to:
- The size of the company, factoring in any linked or partner enterprises as defined under EU State Aid rules
- The start date of the relevant accounting period
- Whether the R&D activities have been subsidised or funded by third-party grants
- The proportion of the company’s qualifying R&D expenditure relative to its total expenditure, including aggregated figures across connected companies
Depending on how a company is positioned in relation to these variables, it will fall within one of the following R&D Schemes.
It is important to note that the eligibility limits for R&D schemes are in Euros, as the UK adopts the EU definitition.
Research and Development Expenditure Credit (RDEC) Scheme
The RDEC scheme is primarily aimed at large companies, defined as those with more than 500 employees and either an annual turnover exceeding €100 million or a balance sheet total above €86 million (when aggregating the position across any linked or partner enterprises). However, SMEs may also be required to claim under RDEC in specific circumstances, particularly where their R&D activities have been subsidised through grants, notifiable state aid, or where they have undertaken R&D as subcontractors on behalf of large companies.
Unlike the SME scheme, the RDEC regime is structured as an above-the-line credit. This means the benefit is taxable. The net benefit will therefore be lower once the credit is subject to corporation tax.
Following reforms effective from 1st April 2023, the RDEC rate was increased from 13% to 20%. After accounting for the impact of taxation, the net benefit a company can expect under the RDEC scheme generally falls in the range of 10.5% to 16.2% of qualifying R&D expenditure depending on the variables that are applicable. This translates to a return of approximately 10.5p to 16.2p for every £1 spent on eligible R&D activity.
Post-1st April 2024 Schemes
Merged Scheme & Enhanced R&D Intensive Support (ERIS)
For accounting periods starting on or after 1st April 2024, the UK government implemented a significant reform of the R&D tax relief framework by merging the former SME and RDEC schemes into a single, unified regime for most companies. The intention behind this consolidation was to simplify the system, reduce abuse, and bring the UK more in line with international models of innovation support.
Under the merged scheme, companies of all sizes (regardless of their previous classification under the SME or RDEC regimes) are generally subject to a standardised set of rules. Relief is provided in the form of a taxable, above-the-line R&D expenditure credit, operating in the same manner as the former RDEC scheme. The credit is applied at a flat rate of 20% of qualifying R&D expenditure. After Corporation Tax is applied, this results in an effective net benefit typically ranging between 14.7% and 16.2%, equating to approximately 14.7p to 16.2p for every £1 of eligible R&D spend.
An important exception to the standard merged scheme applies for loss-making, research-intensive SMEs, under the Enhanced R&D Intensive Support (ERIS) measure. To qualify, a company must meet the SME definition (fewer than 500 employees and either annual turnover under €100 million or a balance sheet total under €86 million, inclusive of any linked or partner enterprises), be loss-making and demonstrate that at least 30% of its total expenditure (aggregated across any connected companies) is attributable to qualifying R&D activity.
Where these conditions are met, the company is eligible to claim under ERIS. This enables it to:
- Deduct an additional 86% of qualifying R&D costs, resulting in a total 186% deduction (100% standard + 86% enhancement)
- Surrender the enhanced loss for a payable credit at 14.5%
This structure mirrors the benefits previously available under the legacy SME scheme. When fully utilised, ERIS can provide an effective benefit of up to 26.97% of qualifying R&D expenditure which is equivalent to receiving 26.97p for every £1 spent on eligible R&D activity.
How Gravita can help
If you’re unsure whether your projects meet the criteria, you’re not alone. Many eligible businesses miss out simply because they don’t realise what qualifies. Our R&D experts can help you understand the rules, assess your eligibility and guide you through the claims process with confidence. Get in touch to start the conversation.
