Research and development tax relief
Making R&D easier for small companies
2 Research and development tax relief: Making R&D easier for small companies
Contents
Making R&D easier for small companies
3
Background
4
What is R&D tax relief?
5
Is my company small or large?
7
Does my company have linked or partner companies?
8
Which projects qualify?
10
How to show that your project is R&D within the tax definition
12
The start and end of a project for R&D tax purposes
14
What costs qualify?
16
What costs do not qualify
19
Subcontracted R&D
20
Subcontracting — who can make a claim?
22
Grants and subsidies
23
More on grants and subsidies
24
Why is RDEC important to SMEs?
25
How to claim R&D relief
26
How to calculate your claim
28
Keeping records
31
Advance Assurance
32
Case Studies
34
The Agri-food Sector
35
ICT
36
Advanced materials
37
Advanced engineering
38
Life and health sciences
39
Construction
40
Further help
41
Frequently asked questions
42
Glossary
43
3 Research and development tax relief: Making R&D easier for small companies
Making R&D easier
for small companies
This guidance outlines how tax relief
for Research and Development (R&D)
works for small and medium-sized
enterprises (SMEs).
It provides:
• straightforward definitions and explanations of
the schemes
• details of qualifying costs
• guidance on how to make a claim under the SME
and RDEC schemes
• advice on where to find help and further detailed
information.
This publication provides general guidance on the law, but how the law applies in a particular case is fact-dependent
and where there is doubt you should contact HMRC.
4 Research and development tax relief: Making R&D easier for small companies
Background
In 2000 the government introduced
a scheme to encourage scientific and
technological innovation within the
United Kingdom.
R&D is a Corporation Tax (CT) tax relief that may reduce
your company’s tax bill if your company is liable for
CT or, in some circumstances, you may receive a
payable tax credit. This guidance is designed to help
you make a claim for tax relief if you are an SME.
The Research and Development Expenditure Credit
(RDEC) scheme was introduced in the Finance Act 2013
— it enables companies with no CT liability to benefit
through a cash payment or a reduction of tax or other
duties due.
Specific definitions of R&D can be found at:
gov.uk/hmrc-internal-manuals/corporate-intangibles-
research-and-development-manual/cird81900
Further guidance on RDEC can be found at:
gov.uk/hmrc-internal-manuals/corporate-intangibles-
research-and-development-manual/cird89705
5 Research and development tax relief: Making R&D easier for small companies
What is R&D relief?
6 Research and development tax relief: Making R&D easier for small companies
What is R&D relief?
For tax purposes, R&D takes place when
a project seeks to achieve an advance in
overall knowledge or capability in a field
of science or technology.
R&D relief allows companies that carry out qualifying
R&D related to their trade to claim an extra CT
deduction for certain qualifying expenditure.
The level of relief available depends upon
which scheme the company uses.
The SME scheme
From 1 April 2015, the relief a company can get has
increased to 230% on their qualifying R&D costs.
Loss-making companies can in certain circumstances
surrender their losses in return for a payable tax credit.
Research and Development Expenditure Credit
(RDEC) scheme
From 1 April 2015 a taxable credit is available at
11% of qualifying R&D expenditure. For loss making
companies the tax credit is fully payable (subject to
certain restrictions).
Features of the RDEC scheme
Companies with no CT liability will benefit from RDEC
either through a cash payment or a reduction of tax or
other duties due. The payable credit is limited to the
company’s PAYE/NIC liabilities of the staff engaged
in qualifying activities in the accounting period.
SMEs will be able to claim RDEC if they do subcontracted
or subsidised research. Companies in groups can
surrender the RDEC against another group company’s
CT liability.
Further information on SMEs can be found on page 23.
7 Research and development tax relief: Making R&D easier for small companies
Is my company small or large?
To find out if a company is an SME for R&D tax relief
purposes we look at:
• staff headcount (less than 500)
• either turnover (€100m) or balance sheet total
(less than €86m).
When accounts are prepared in sterling, convert the
turnover and balance sheet totals to euros, using the
exchange rate for the balance sheet date.
Sometimes, a company will have to take into account
its own data, a proportion of a partner enterprise’s data
or the data of a linked enterprise. There’s more about
partner and linked enterprises on the next page. If your
company has no external investors and isn’t in a group,
you only need to count your own company data.
8 Research and development tax relief: Making R&D easier for small companies
Does my company have linked
or partner companies?
If your company has external investors
or is in a group, it’s worth looking at
the detailed guidance. The following is
a summary of the main rules.
Linked companies
If the company is controlled by or controls other
companies it is a linked company, for example if it
has more than 50% of the shareholders’ or members’
voting rights in another company.
The data of the linked companies should be added
to the data from the company that does the R&D.
Partner companies
If 25% or more of a company is owned by another,
or if the company owns 25% or more of another, it is
a partner company.
Certain companies and types of investor are excluded
from consideration as a partner. There is more about
this in the detailed guidance.
Detailed guidance on linked and partner companies
can be found at: gov.uk/hmrc-internal-manuals/
corporate-intangibles-research-and-development-
manual/cird91000
A proportion of the data of the partner companies
should be added to the data from the company that
does the R&D. So if the other company controls 30%
of the R&D company, add 30% of its data.
9 Research and development tax relief: Making R&D easier for small companies
B
owns 60% of
A
A
does the
R&D
D
owns 25% of
B
C
owns 35% of
B
A will add 25% of the accounts figures of D.
So if D has a turnover of €30m,
A will add €7.5m to its totals.
A will add 100% of the accounts figures of B.
So if B has assests of €10m,
A will add €10m to its totals.
A will add 35% of the of the accounts figures
of C. So if C has turnover of €100m, A will
add €35m to its totals
Example of a company being a linked or
partner company
Company A is linked to Company B because B has a
60% holding in A.
B also has two partner companies: C and D,
which own 32% and 25% of B.
A must add 100% of the data of B plus 35% of the
data of C and 25% of the data of D to its own data.
10 Research and development tax relief: Making R&D easier for small companies
Which projects qualify?
11 Research and development tax relief: Making R&D easier for small companies
Which projects qualify?
Work that advances overall knowledge
or capability in a field of science or
technology, and projects and activities
that help resolve scientific or technological
uncertainties, may qualify for R&D relief.
R&D has a specific statutory definition for the
purposes of R&D tax relief which is not the same as
the commercial, engineering or accounting definitions.
To qualify the company must be carrying out research
and development work in the field of science or
technology. The relief is not just for ‘white coat’ scientific
research but also for ‘brown coat’ development work in
design and engineering that involves overcoming difficult
technological problems.
This can include creating new processes, products or
services, making appreciable improvements to existing
ones and even using science and technology to duplicate
existing processes, products and services in a new way.
But pure product development in itself does not qualify.
Some examples of qualifying activities include software
development, engineering design, new construction
techniques, bio-energy, cleantech, agri-food and life
and health sciences. There are case studies at the end
of this guide for these industries.
Things to consider
• Does my company have a project?
• Am I seeking an advance in a field of science
or technology?
• Does the advance extend the overall knowledge
or capability in the field of science or technology
and not just the company’s own state of knowledge
or capability?
• Does the project involve an uncertainty that competent
professionals can’t readily resolve and where solutions
aren’t common knowledge?
Judging which projects and activities will qualify for
R&D tax relief is usually the area where most people
seek help. Experience has shown that companies
can benefit from HMRC’s early involvement. There is
information about our Advance Assurance scheme,
which helps with these issues, later in this guide.
12 Research and development tax relief: Making R&D easier for small companies
How to show that your project
is R&D within the tax definition
When you submit a claim it helps if you
give details of your project. The questions
below will help you decide if your project
is within our definition for R&D. If your
claim clearly sets out how you approach
these questions, it helps HMRC see that
your company really is doing R&D.
1. What is the scientific or technological advance?
Concentrate on the science and technology
Rather than stating the product, process or functionality
being developed, consider what scientific or technological
advance is being sought. This focuses attention on the
project’s aim for an advance. This is important in judging
whether or not R&D for tax relief purposes is being
undertaken.
Some activities aren’t science
Science doesn’t include work in the arts, humanities
and social sciences (including economics).
‘Commercially innovative’ isn’t enough
It’s not enough that a product is commercially
innovative. You can’t claim in respect of projects to
develop innovative business products or services that
don’t incorporate any advance in science or technology.
2. What scientific or technological uncertainties
were encountered?
Did you really encounter ‘uncertainty’?
Scientific or technological uncertainty exists when
knowledge of whether something is scientifically
possible or technologically feasible, or how to achieve
it in practice, isn’t readily available or deducible by a
competent professional working in the field.
Not every problem is an uncertainty
But uncertainties that can be resolved through
relatively brief discussions with peers are routine
uncertainties rather than technological uncertainties.
Technical problems that have been overcome in
previous projects on similar systems aren’t likely to
be technological uncertainties.
Set out what happened
In your claim, you should set out at a high level, in a
way that can be understood by someone who’s not
an expert, what the uncertainties were and when they
started and ended.
13 Research and development tax relief: Making R&D easier for small companies
3. How and when were the uncertainties overcome?
Describe the methods used to overcome the
uncertainties and the investigations and analysis
undertaken. This shouldn’t be in great detail,
but enough to show it wasn’t straightforward.
Describe the successes and failures and the impact of
these on the overall project. If the uncertainties weren’t
overcome, explain what happened.
Remember that the commercial failure of the product
or project does not mean that R&D was not present.
And if the scientific uncertainties weren’t overcome,
that can still mean that the work to address the
uncertainties can be R&D.




4. Why wasn’t the knowledge being sought readily
deducible by competent professionals?
Explain the uncertainty in the context of the known
state of the field of research
It might be publicly known that others have tried to
resolve the uncertainties and failed. Or maybe others
have resolved the uncertainties, but precisely how it
was done isn’t in the public domain. In either case a valid
technological uncertainty can still exist.
What if there’s limited available information about the
state of the field of research?
If there’s little public information available about the
project, you’ll need to show that the people leading
it are competent professionals working in the relevant
field. This might be done by outlining their relevant
background, professional qualifications and recent
experience and then have them explain why they
consider the uncertainties are scientific or technological
uncertainties rather than routine uncertainties.
Whichever is appropriate, set out the details and have
evidence available if needed.
14 Research and development tax relief: Making R&D easier for small companies
The start and end of a project
for R&D tax purposes
It’s important to know when an R&D
project starts and ends, because that
makes sure your company claims the
right amount of relief.
When a project starts
The project starts when work to resolve the uncertainty
starts. This is when you have identified the technical
issues that need to be resolved, and the current state
of knowledge within that field of science or technology
has not provided a solution to those uncertainties.
When a project ends
A project ends when that uncertainty is resolved or
the work to resolve it ceases. This is when you have a
working prototype or material device/product or process
ready to be tested or go into production, or if you decide
not to take the project forward.
R&D can take place even after production starts
If any new problems arise involving scientific or
technological uncertainty after the product has been
put into production or into use then the R&D process
may start again. There is a distinction between
such problems involving science and technological
uncertainties and routine fault fixing or design tweaks.
It is particularly important that the people doing the
work are involved when considering whether the project
is R&D for tax purposes as they are the ones who
understand best the scientific or technological problems
involved. They should focus on what advances the
project is seeking to achieve and the uncertainties to
be faced rather than on the eventual product aspiration,
specification or design.
15 Research and development tax relief: Making R&D easier for small companies
Possible commercial project timeline —
defining R&D for tax purposes
This illustrates the qualifying and non-qualifying
activities within a ‘whole life’ project plan.
The parts of a project that require R&D activity to
resolve scientific or technological uncertainties qualify
for tax relief. The qualifying work starts when work to
resolve the uncertainty starts, and ends when the new
knowledge is codified in a usable form, or when work
to resolve the uncertainty ceases.
Beginning
End
RESOLUTION of scientific
or technological uncertainty
RESOLUTION of scientific
or technological uncertainty
Commercial/
scientific
Idea
Technological
or Scientific
Uncertainty
ascertained
Technological
or Scientific
Uncertainty
ascertained
Market/
feasibility
Research
Technological
or Scientific
Uncertainty
resolved or
work to resolve
it stops
Technological
or Scientific
Uncertainty
resolved or
work to resolve
it stops
Patents
or other
IP protection
sought
Pre-production
design
Industrial
upscaling
Patents
or other
IP protection
sought
Commercial
application
Prototypes
Prototypes
Non-Qualifying
Non-Qualifying
Non-Qualifying
Qualifies
Qualifies
Examples of how this may apply to some of the
industry sectors can be found on page 35 onwards.
16 Research and development tax relief: Making R&D easier for small companies
What costs qualify?
17 Research and development tax relief: Making R&D easier for small companies
What costs qualify?
Direct and externally provided staff,
subcontracted R&D, consumables,
software, trials, prototyping and
independent research costs may all
qualify for R&D relief. Capital expenditure
does not qualify under this scheme,
nor does expenditure on the production
and distribution of goods and services.
Direct R&D staff costs
Your company can claim for salaries, wages, class 1 NIC
and pension fund contributions for staff directly and
actively engaged in the R&D project.
This covers employees who undertake ‘hands on’ R&D
work and the proportion of supervisory and managerial
time spent specifically directing such employees in those
activities.
Support staff costs, for example administrative or
clerical staff, do not qualify, except when they relate to
qualifying indirect activities. These can be activities like
maintenance, clerical, administrative and security work.
A more detailed definition of support staff costs at:
hmrc.gov.uk/manuals/cirdmanual/CIRD81900.htm

Your company cannot claim for employment-related
benefits.
Externally provided R&D staff
These are the staff costs paid to an external agency for
staff who are directly and actively engaged in the R&D
project — these are not employees and subcontractors.
Relief is usually given on 65% of the payments made to
the staff provider. Special rules apply if the company and
staff provider are connected or elect to be connected.
Further information on externally provided R&D staff
can be found at: hmrc.gov.uk/manuals/cirdmanual/
cird84000.htm
18 Research and development tax relief: Making R&D easier for small companies
Subcontracted R&D
SME Scheme
Your company can generally claim for 65% of
the payments made to unconnected parties.
The subcontracted work may be further subcontracted
to any third party. Special rules apply where the parties
are connected or elect to be connected.
RDEC Scheme
R&D expenditure subcontracted to other persons is
generally not allowable unless it is directly undertaken
by a charity, higher education institute, scientific research
organisation or health service body — or by an individual
or a partnership of individuals.
Further information on SME/RDEC schemes can be found
at: hmrc.gov.uk/manuals/cirdmanual/cird84250.htm

Consumable items
Your company can claim for the cost of items that are
directly employed and consumed in qualifying R&D
projects. These include materials and the proportion
of water, fuel and power consumed in the R&D process.
From 1 April 2015, the costs of materials incorporated
in products that are sold are not eligible for relief.
Further information on consumable items can be found at:
hmrc.gov.uk/manuals/cird82300.htm
Software directly used in the R&D
Your company may claim for the cost of software that
is directly employed in the R&D activity. Where software
is only partly employed in direct R&D, an appropriate
apportionment should be made.
Further information on software directly used in the
R&D can be found at:
hmrc.gov.uk/manuals/cirdmanual/cird82500.htm

Clinical trial volunteers
Pharmaceutical companies and research organisations
often make payments to volunteers taking part in clinical
trials. These are allowable for relief, but read
the guidance first.
Further information on payments to volunteers taking
part in clinical trials can be found at:
hmrc.gov.uk/manuals/cirdmanual/cird84400.htm

Contributions to independent research
Only large companies may claim R&D relief on
contributions they make towards funding relevant
independent R&D. This R&D must be carried out by
the recipient and be related to the company’s trade.
Contributions must be made to a qualifying body —
a charity, higher education institute, scientific research
organisation or health service body — or to an individual
or a partnership of individuals.
Further information on contributions to independent
research can be found at:
hmrc.gov.uk/manuals/cirdmanual/cird82200.htm
hmrc.gov.uk/manuals/cirdmanual/cird82250.htm
Prototypes
Where a prototype is created to test the R&D being
undertaken, the design, construction and testing costs
will normally be qualifying expenses.
However, if the prototype is also built with a view to
selling the prototype itself (such as the construction
of a bespoke machine), HMRC considers that to be
production and outside the R&D scheme, even if R&D
was undertaken to create the prototype.
In that case you need to work out the split between
R&D expenditure and production costs. For example,
the construction costs and materials consumed would
not be qualifying expenses, but design, modelling and
testing costs could still qualify.
Collaborative working
In general, where two companies collaborate on a R&D
project, each can claim relief on the qualifying costs they
have incurred.
Where a company and a university or other research
institute collaborate, only the company can claim relief
on the qualifying costs it has incurred.
Collaborative arrangements are governed by their
contracts and you should seek advice from HMRC
where it’s unclear which company gets the relief.
19 Research and development tax relief: Making R&D easier for small companies
What costs do not qualify
Not all costs qualify, and you cannot receive R&D
relief for:
• The production and distribution of goods and services
• Capital expenditure under either of the R&D relief
schemes. However, a generous 100% Research and
Development Allowance may be due on capital assets,
such as plant, machinery and buildings used for R&D
activity.
Further information on capital assets used for R&D
activity can be found at: gov.uk/hmrc-internal-
manuals/capital-allowances-manual/ca60000
• The cost of land
• Payments for the use and creation of patents and
trademarks, as these are the cost of protecting the
completed R&D. This also includes the staff costs
in relation to the time spent by all staff on the
preparation and submission of such applications.
However, the Patent Box enables companies to apply
a 10 per cent rate of Corporation tax to profits earned
from their patented inventions after 1 April 2013.

Further information on Patent Box be found at:
gov.uk/guidance/corporation-tax-the-patent-box
20 Research and development tax relief: Making R&D easier for small companies
Subcontracted R&D
21 Research and development tax relief: Making R&D easier for small companies
Subcontracted R&D
SMEs that subcontract qualifying R&D
activities can claim tax relief on 65%
of the payment to the subcontractor.
SMEs undertaking qualifying R&D for
large companies may claim under the
RDEC Scheme.
Your company as the contractor
Under the SME Scheme the subcontractor does not
need to be a UK resident and there is no requirement
for the subcontracted R&D to be performed in the UK.
There are special rules where the parties are connected
or elect to be connected. The diagrams below help
explain what you may claim.
Further information and guidance on connected
and unconnected companies can be found at:
gov.uk/hmrc-internal-manuals/corporate-intangibles-
research-and-development-manual/cird91000
Your company as the
subcontractor
Generally, if an SME or large company carries out an
R&D project under contract to a large company or
person not chargeable to tax in the UK as a trade,
profession or vocation, they are likely to be able to
make a claim under the RDEC scheme.
Further information and guidance on your company
as the subcontractor can be found at:
hmrc.gov.uk/manuals/cirdmanual/cird81470.htm
Unconnected Subcontractors
SME
Scheme
Company can
claim 65% of
the qualifying
R&D payment
made to a
subcontractor
RDEC
scheme
Generally the
expenditure
contracted to
other persons is
not allowable
However
100% of the R&D
expenditure can
qualify if the
subcontractor falls
within Note 1
Connected Subcontractors
SME
Scheme
The lesser of
100% of the R&D
payment made to
the subcontractor
or the relevant
expendature in
the connected
party’s accounts
See
Note 2
RDEC
scheme
Generally the
expenditure
contracted to
other persons is
not allowable
However
100% of the R&D
expenditure can
qualify if the
subcontractor falls
within Note 1
Note 1:
An individual, a partnership
made up wholly of individuals,
or a qualifying body. Further
information can be found at:
hmrc.gov.uk/manuals/
cirdmanual/cird82250.htm
Note 2:
Definitive rules can be found at:
hmrc.gov.uk/manuals/
cirdmanual/cird84200.htm
22 Research and development tax relief: Making R&D easier for small companies
Subcontracting —
who can make a claim?
Contracting company
Relief
Subcontractor
Relief
SME
Yes
SME
No
SME
Yes
Large company
No
SME
Yes
Qualifying body, individual or
partnership
No
Large company
No
SME (even if the SME further
subcontracts to qualifying body
individual or partnership)
Yes (under RDEC scheme)
Large company
No
Large company
Yes
Large company
Yes
Qualifying body, individual or
partnership
No
Large company
No
Another group company
Yes
23 Research and development tax relief: Making R&D easier for small companies
Grants and subsidies
Grants or subsidies that your company
receives for your R&D project may make
a difference to your R&D claim.
The SME scheme is a notifiable State Aid, and a company
can’t get the SME relief if is receiving any other notifiable
State Aids for the same R&D project.
So if you are thinking of claiming for a project that has
already received a grant, it is essential that you establish
whether that grant was a notifiable State Aid. The grant
provider will be able to tell you that.
If you have received a grant which is notifiable State Aid,
for an R&D project, you can’t get relief under the SME
scheme, but eligible expenditure will qualify under the
RDEC scheme.
You don’t need to reduce the RDEC eligible expenditure
by the value of the grant received.
If the company has a number of projects it may
make RDEC claims for projects that have had State Aid,
and SME claims for non-grant funded project(s).
24 Research and development tax relief: Making R&D easier for small companies
More on grants and subsidies
You may have received a grant which
is not a notifiable State Aid — examples
include de minimis State Aid, Horizon
2020 or Framework Programme funding.
If you have received a grant which is not a notifiable
State Aid, or have received any other type of subsidy for
one of your R&D projects, you may be eligible to claim
under both the RDEC and the SME scheme.
You can claim under the RDEC scheme for eligible
expenditure which has been subsidised by the grant or
subsidy. In addition, if there is eligible expenditure on
the project which has not been covered by the subsidy,
you can make a claim for the balance of the expenditure
under the SME scheme.
Example
Expenditure on project:
£125,000 — staff and consumables
Amount of grant received:
£80,000 — potentially eligible for RDEC claim
Balance of expenditure:
£45,000 — potentially eligible for SME Claim
25 Research and development tax relief: Making R&D easier for small companies
Why is RDEC important to SMEs?
SMEs may also claim relief under the
RDEC scheme if they cannot claim under
the SME scheme because of a grant or
subsidy, or because they are carrying out
subcontract R&D for a large company.








SME worked example
Profit and Loss
Account (£)
Sales
1,000
Cost of sales
(500)
Gross profit
500
R&D qualifying expenditure
(100)
Other expenses
(150)
Total operating costs
(250)
Net profit before tax
250
Tax due (see below)
24
Total tax
24
Profit after tax
226
Corporation Tax
Computation (£)
Net profit before tax
250
Less R&D relief
(130%) (130)
Adjusted profit before tax
120
Corporation Tax due at 20%
24
Corporation Tax
payable (£)
Corporation Tax
24
RDEC worked example
Profit and Loss
Account (£)
Sales
1,000
Cost of sales
(500)
Gross profit
500
R&D qualifying expenditure
(100)
11% RDEC on expenditure
11
Other expenses
(150)
Total operating costs
(239)
Net profit before tax
261
Tax due at 20%
52.2
Total tax
52.2
Profit after tax
208.8
Corporation Tax
Computation (£)
Net profit before tax
261
Corporation Tax due at 20%
52.2
Tax payable (£)
Corporation Tax due
52.2
Less tax credit
(11)
Corporation Tax payable
41.20
26 Research and development tax relief: Making R&D easier for small companies
How to claim R&D relief
27 Research and development tax relief: Making R&D easier for small companies
How to claim R&D tax relief
Making a claim
CT600
You can claim R&D relief by entering the total qualifying
expenditure on the full Company Tax Return form,
CT600.
Payable Tax Credit
Under the SME scheme, SMEs that prepare their accounts
on a going concern basis may be able to claim a payable
tax credit - up to 14.5% of the R&D loss surrendered from
1 April 2014.
Backdated claims
If your company has been undertaking qualifying R&D
and has not yet claimed R&D relief, you may make a
backdated claim within the anniversary of your filing
date — generally two years after the end of the
accounting period.
28 Research and development tax relief: Making R&D easier for small companies
How to calculate your claim
There are three stages to making your
claim. Using an example, we explain
how to take your figures and turn them
into a claim.
1. Work out your allowable
expenditure
Your total costs
What is allowable
Total
R&D staff (x3) with total
costs £150,000 and 80%
time directly on R&D.
£150,000 x 80% allowable
as staff costs
£120,000
R&D manager’s costs
£100,000 with 20% of
time directly managing
the R&D activity.
£100,000 x 20% allowable
as staff costs
£20,000
Heat and light £5,000
with 25% consumed in
R&D project
£5,000 x 25% allowable
as consumable items
£1,250
Disposable laboratory
equipment consumed
£200
£200 allowable as
consumable items
£200
£80,000 payments
to an unconnected
subcontractor for R&D
work
£80,000 x 65% of
payments allowable as
subcontracted R&D
£52,000
£70,000 payments to
an unconnected staff
provider for staff directly
engaged on R&D.
£70,000 x 65% allowable
as an externally provided
worker (EPW).
£45,500
£238,950
In this example, we’ve worked out that the total
qualifying expenditure is £238,950.
The next thing to do is to turn this into a figure for
the amount of R&D tax relief that the company wants
to claim.
29 Research and development tax relief: Making R&D easier for small companies
2. Turn the allowable
expenditure into an
R&D tax relief figure
Total allowable costs
£238,950
Multiply by 130%
£310,635
Add these together to get the total R&D tax relief:
‘enhanced expenditure’
£549,585
3. Put the R&D tax relief into
the right box on the company
tax return
Now that we have worked out the R&D tax relief, this can
be entered onto the company tax return
For accounting periods that start on or after 1 April
2015, use version 3 of the company tax return. Version 2
is for periods before this. The two versions have different
box numbers, so we provide guidance on both. Check the
front page of the tax return to see which version you are
using.
Using version 3 of the company tax return
Put an X in the box at box 650.
Enter the enhanced expenditure figure in box 660
— in this example you would enter £549,585.
30 Research and development tax relief: Making R&D easier for small companies
Using version 2 of the company tax return
Put an X in the box at box 99.
Enter the enhanced expenditure figure in box 101
— in this example you would enter £549,585.
Claiming the payable tax credit?
If your company wants to claim a payable tax credit,
there are a couple more steps to carry out before you
fill in the tax return.
First you need to know how much tax you are due to
pay in this period.
Second, you need to calculate the amount of the
payable tax credit. In the simplest cases, this figure will
be (‘enhanced expenditure’ x payable tax credit rate).
Using 2016 rates and the example above, the payable
tax credit will be:
£549,585 x 14.5% = £79,690.
Guidance on how to calculate the amount of the payable
tax credit can be found at: gov.uk/hmrc-internal-manuals/
corporate-intangibles-research-and-development-
manual/cird90500
Now you are ready to enter the figures.
Using version 3 of the company tax return
Enter the company’s Self Assessment figure in box 525.
Enter the tax credit figure in box 530 — in this example
you would enter £79,690.
Complete box 545 — in this example, you would enter
£79,690.
Complete box 570 — that’s box 545 minus box 525.
Put an X in the box at box 650.
Enter the enhanced expenditure figure in box 660
— in this example you would enter £549,585.
Enter the payable tax credit figure at box 875 — in this
example, you would enter £79,690.
Using version 2 of the company tax return
You need to complete boxes 86, 87, 89, 99, 101 and 143.
Claiming the RDEC?
Using version 3 of the company tax return.
You need to calculate the expenditure credit due to the
company. Using 2016 rate, and for this example, it would
be £238,950 x 11% = £26,285.
Enter the expenditure credit figure at box 530 — in this
case, it is £26,285.
Complete box 570.
Check box 650, and for box 660 enter £549,585.
Complete box 880 — in this case it will be £26,285.

31 Research and development tax relief: Making R&D easier for small companies
Keeping records
There is no additional record keeping
requirement specifically for the purposes
of claiming R&D relief.
You should be able to give a summary of the R&D
project undertaken and explain how the project is R&D
within the tax relief definition. It would be helpful if you
provide this information in a short report at the time of
making your claim.
Focus on the advances being sought and the
uncertainties faced rather than just a description of
the finished product. Include a breakdown of the
expenses that qualify for relief.
32 Research and development tax relief: Making R&D easier for small companies
Advance Assurance
33 Research and development tax relief: Making R&D easier for small companies
Advance Assurance
In November 2015, HMRC introduced
Advance Assurance for companies that
claim R&D tax relief in November 2015.
If your company carries out R&D for itself or other
companies, it could qualify for Advance Assurance.
This means that for the first three accounting periods
of claiming for R&D tax relief, HMRC will allow the claim
without further enquiries.
Applying for Advance Assurance is voluntary and you
can do this at any time before the first claim for R&D
tax relief. Your company can still apply for R&D tax relief
without Advance Assurance.
Further information, help and advice can be found at:
gov.uk/guidance/research-and-development-tax-relief-
advance-assurance
34 Research and development tax relief: Making R&D easier for small companies
Case Studies
35 Research and development tax relief: Making R&D easier for small companies
The Agri-food Sector
The Agri-food sector is increasingly
exploiting new science and technology.
A project to develop a new feed or to grow crops that
have substantially increased vitamin content, produce
better or more reliable yields, or are more tolerant to
weather conditions and resistant to blight, would be
qualifying R&D.
The scientific and technological advance is in resolving
the uncertainty in the creation of a new improved strain.
However, work to protect this new strain with plant
breeding rights does not qualify as it is regulatory,
not scientific or technological activity.
Not every change advances overall knowledge and
capability. Creating new Vitamin C rich confectionery
simply by adding Vitamin C to the ingredients does
not qualify. A competent professional could carry out
the process without uncertainty in either combining the
ingredients or their reaction in the body when consumed.
Creating an innovative chilled food container
that provides a substantially longer shelf life than
currently available, would also qualify. The scientific
or technological uncertainties to be addressed are in the
interactions between the food, gas content and container
to keep the food fresh for longer. By contrast, the work
in dealing with authorities to comply with extended
use-by date regulation would not qualify.
Not all innovation qualifies. A project to create a food
container where the innovation lies in the artistic
design or presentation of the packaging to encourage
prospective customer purchases would not qualify.
The uncertainty here is in design or marketing, not
in science or technology.
36 Research and development tax relief: Making R&D easier for small companies
ICT
The computer games industry provides
particularly good examples of innovative
projects that do meet the requirements
of the R&D schemes and also examples
of projects which do not.
No matter how original and inventive the game
storylines are, these are not scientific or technological
advances. The important criterion is not ‘what’ is
produced but ‘how’.
A company realised that each object on a game’s screen
had to be programmed in respect of its interaction
with all the other objects. As the game became more
complex, more objects were introduced and the amount
of code required rose exponentially. The solution was
to programme the properties of each object. When
the objects interacted, a separate code was no longer
required as the inherent properties produced the
outcomes. The qualifying expenditure on developing this
innovative code qualified for R&D relief.
The ICT sector is so fast-moving that further advances
overtake new and ground breaking developments very
quickly. What is important is that a project represents
an advance at the time of development.
New encryption and security techniques are being
developed regularly and in many cases give rise to
further advances. Even if the technique is quickly
rendered redundant it will probably qualify for relief.
The same applies to new search engines using new
search methods.
Many advances are in the software field but advances
in hardware are not unusual and will qualify for R&D
relief if they are designed to overcome a scientific or
technological uncertainty. Equally, very small companies
dealing in subcontracted work may qualify if the work
undertaken is sufficiently innovative, even if the larger
contractor’s project does not qualify.
37 Research and development tax relief: Making R&D easier for small companies
Advanced materials
Whilst some companies specialise in the
design and production of new materials,
other companies find they become
involved in this area as an adjunct
to their main activities.
A company, specialising in agricultural engineering,
used a probe to provide information on the quality of
cereals which were transported in sacking. Measurements
could only be taken at the top, as anywhere else would
damage the sacking. This however did not produce
representative samples.
The company designed a material which allowed a
probe to enter the sacking and which reverted to
a sealed surface once the probe was removed.
Although the market for this material was limited,
it proved extremely successful in overseas markets.
For R&D purposes the company incurred qualifying
expenditure in overcoming the uncertainty in
developing the material.
A further development arose when the company
received orders from Eastern European countries,
where the material did not react in the required way
in sub-zero temperatures. The company undertook
further research to amend the material to meet the
requirements of the extreme conditions. The additional
expenditure on manufacturing the material was not
qualifying but the research costs of amending the
material to meet ‘cold weather’ issues again qualified.
In many projects involving advanced materials, the
scientific and/or technological uncertainty can be readily
identified. However, the use of ‘new’ materials in existing
processes may also qualify if it can be shown that the
outcome has or was intended to significantly improve
efficiency, for example, significantly reduce waste.
38 Research and development tax relief: Making R&D easier for small companies
Advanced engineering
R&D is increasingly providing an
important competitive edge in this sector.
A project is commissioned to produce a prototype
(not to be sold) that will test a design for a new
eco-petrol engine and exhaust. The goal is to achieve
a substantial reduction in eco-unfriendly emissions with
a performance at least as good as a comparable engine.
This appears to competent professional engineers to
offer hope of achieving a real advance by way of an
improvement in vehicle technology. The uncertainty
in science and technology is whether this substantial
reduction with the comparable performance sought is
possible. Even if unsuccessful, this and the construction
of the prototype is still a qualifying R&D project.
On the other hand, an innovative in-bus eco-waste bin,
where the innovation is in the attractive and appealing
presentation of different compartments designed
specifically to encourage the usage and promotion of
recycling, does not qualify. The uncertainty of persuading
people to put their litter in the bin is in the field of social
science, not in the field of technology. The technology
required would be obvious to a competent engineer.
A project for a new standard bus engine which is
substantially lighter, cheaper, or faster to produce
than any currently available or known to be possible
(for example patented), whilst maintaining performance
levels (for example in power, robustness and life) can all
qualify as R&D. However, a minor and routine adjustment
such as one to incorporate slightly better spark plugs,
already designed and used in another vehicle, would
not qualify.
39 Research and development tax relief: Making R&D easier for small companies
Life and health sciences
The creation of new drugs is an obvious
example of qualifying R&D in this sector.
Creating a new drug, up to and including Phase III trials,
to more effectively and safely reduce the risk of a stroke,
is a qualifying project. The salaries of both the scientists
and their laboratory assistants doing this hands-on R&D
can qualify. However, their work to achieve important
regulatory FDA approvals does not qualify, because any
uncertainty in achieving these is in regulation,
not science or technology.
A project to create a new artificial bladder system for
patients with urinary difficulties, substantially more
comfortable, safe and leak-proof than any other
designed, qualifies as R&D. The advance sought and
uncertainty addressed is how to bio-engineer the
materials to achieve these qualities, enabling safe
insertion and avoiding rejection.
However, where a competitor reverse-engineers this
product, for markets not covered by any intellectual
property protection, this does not qualify. The advance
in science or technology worldwide has already been
overcome and the competitor’s uncertainty is not an
uncertainty at industry sector level, rather an uncertainty
in their own state of knowledge.
A project for newly-diagnosed diabetes patients to
provide details of their blood sugar to the hospital via
a simple internet web form is innovative. It allows the
hospital to monitor their condition in real time and
advise the patient immediately on how best to manage
their condition.
Although this achieves an advance in patient care,
any uncertainty associated with the patient’s use of
the software is not an uncertainty in the technology
itself. As such, this is not a qualifying R&D project.
The design of the web-based system would be obvious
to a competent professional.
40 Research and development tax relief: Making R&D easier for small companies
Construction
In general, this is a traditional and
well-proven industry. However an
increasing number of companies
undertake R&D to exceed the traditional
methods in terms of life expectancy of
buildings, durability or robustness.
A company created a cladding system which had the
appearance of ‘normal’ brickwork but incorporated the
capacity for off-site fabrication, improved fire protection
and suitability to fast-track production. Mechanical fixing
rather than wet mortar provided strength and durability,
which together with the capacity to construct in all
weather conditions provided significant cost savings.
The uncertainty of the materials in the cladding system
and the technological uncertainties surrounding fixing
were qualifying R&D projects.
Another company specialised in constructing laboratories.
To combat contamination the company designed some
new buildings with removable sections. Exterior walls
could be slid away and a unit could be removed in total
and replaced by a new unit before the exterior walls
were slid back into place.
The technological uncertainties surrounding the
mechanisms to achieve this had to be overcome
before the concept proved viable, making this a
qualifying project.
A further example of innovation is a company which
used wood in part of a project. Traditionally the wood
needed to be of a certain age but the company was able
to modify a coating so that younger and cheaper wood
could be used whilst still having the required qualities.
Significantly this development was a small element of
an overall conventional project. Only after discussion
with the site foreman did the company directors realise
that the modification and application of the coating
qualified for R&D relief.
41 Research and development tax relief: Making R&D easier for small companies
Further help
Further information on about Research and Development
relief can be found at: gov.uk/guidance/corporation-tax-
research-and-development-rd-relief
Further information on Advance Assurance can be
found at: gov.uk/government/publications/research-
and-development-tax-relief-application-for-advance-
assurance-for-research-and-development-tax-relief-ct-
rd-aa
Department for Business, Energy and Industrial Strategy
(BEIS) guidelines can be found at:
gov.uk/hmrc-internal-manuals/corporate-intangibles-
research-and-development-manual
42 Research and development tax relief: Making R&D easier for small companies
Frequently asked questions
Can I claim R&D relief and a grant?
Yes, however the EU notification status of the grant
will affect under which R&D scheme you can claim.
Most grants are ‘notifiable’ therefore both SMEs and
large companies can claim under the Large Company
Scheme or the RDEC scheme on the gross qualifying
expenditure.
How do I know if a grant is notified?
Your grant provider will be able to tell you whether
or not the grant/subsidy is notified.
Can I claim patent costs?
The costs of preparing and registering a patent are not
R&D — they are the costs of protecting the completed
R&D. However, the Patent Box enables companies to
apply a 10% rate of Corporation Tax to profits from its
patented inventions after 1 April 2013.
Further information on claiming patent costs can be
found at: gov.uk/corporation-tax-the-patent-box
What is the difference between a subcontractor
and an externally provided worker?
A subcontractor is a person paid by the R&D company to
carry out a specific R&D activity. An externally provided
worker is an individual who provides or is under an
obligation to provide their services personally to the
R&D company under the terms of a contract between
them and the staff provider. The individual will be paid
by the staff provider but work under the R&D company’s
direction. The company pays the staff provider.
How do I treat R&D losses?
Under the SME scheme, for expenditure incurred on
or after 1 April 2014, the company may surrender the
R&D loss for a payable tax credit of 14.5% (previously
11% from 1 April 2012). Any unsurrendered or unutilised
losses under either the SME or RDEC schemes may be
carried forward to be set against future years trading
profits under the normal corporation tax rules.
How long will it take to receive an R&D tax credit
repayment?
HMRC aims to deal with 95% of payable tax credit claims
within 28 days of receiving the claim.

43 Research and development tax relief: Making R&D easier for small companies
Glossary
Appreciable improvement — to change or adapt the
scientific or technological characteristics of something
to the point where it is ‘better’ than the original. The
improvement should be more than minor or routine
upgrading and should represent something that would
generally be acknowledged by a competent professional
in that field as a genuine and non-trivial improvement.
Appropriate proportion — the expenditure claimed
by the company for R&D must be representative of
the amount of time spent carrying out qualifying R&D
activity. The company must be able to demonstrate that
costs have been calculated to remove any elements that
were not incurred during the R&D process.
Competent professional — an expert working within
the field of science or technology in which the advance
is being sought.
Consumable items — Where R&D activity results in
items being wholly used up or transformed within the
process these are consumable items and may be eligible
for relief. However, from expenditure incurred on or after
1 April 2015 where those items are incorporated into the
final product and sold then the costs of those items will
not be eligible for relief.
Corporation Tax — A limited company must pay
Corporation Tax on profits from doing business, however
the amount of Corporation Tax you pay may be reduced
if you are undertaking relevant R&D activity.
Externally provided workers (EPW) — Workers are
provided through a staff provider. The staff provider is
required to operate PAYE in relation to individual workers
supplied to a client.
The conditions to be satisfied can be found at:
gov.uk/hmrc-internal-manuals/corporate-intangibles-
research-and-development-manual/cird84100
Filing date — The date by which a company has to
submit its tax return to HMRC. The date will be shown
on the notice issued to the company. Any amendment to
a tax return must be submitted no later than 12 months
after the filing date.
Notifiable State Aid — State Aid is granted by public
authorities through state resources to provide assistance
to an organisation. Many companies receive State Aid as
a contribution towards their research and development
activity. If your company receives State Aid then HMRC
needs to know as it can affect the amount you can claim
in R&D tax relief. Your grant notification documents will
say it the grant is notifiable State Aid or not.
Prototype — An original model constructed to include
all the technical or scientific characteristics of the new
product or process determined by the R&D undertaken
within a project.
44 Research and development tax relief: Making R&D easier for small companies
R&D — Research and Development for tax purposes
takes place when a project seeks to achieve an advance
in science or technology. The work is undertaken on a
systematic basis in order to resolve technical or scientific
uncertainty and aims to advance the level of knowledge
in a particular field of science beyond the level known
before the research and development took place.
R&D project — The R&D project is not the project
to develop the product. See paragraph 19 of the
Department for Business, Energy and Industrial
Strategy (BEIS) guidelines (formerly Business Innovation
and Skills {BIS}) which defines the “project” for R&D
purposes. We very often see claims stating that the
advance is the creation of a project which does x, y,
or z (and where the claim is based on the costs of
creating that product).
That is not the correct test. The specific advances in
science and technology with that (commercial) project
must be identified. Each such specific advance will be
a separate R&D project. Only the costs of resolving the
scientific or technological uncertainties linked to each
of those advances will qualify.
RDEC — Research and Development Expenditure Credit.
A stand-alone credit to be brought into account as a
receipt in calculating the profits of large companies for
research and development expenditure incurred on or
after 1 April 2013. Companies with no corporation tax
liability will benefit from RDEC either through a cash
payment or a reduction of tax or other duties due.
Readily deducible — Where the knowledge or capability
is publicly available or known by competent professionals
working in the field.
Science — Science is the systematic study of the nature
and behaviour of the physical and material universe.
Work in the arts, humanities and social sciences, including
economics, is not science for the purpose of these
guidelines. Mathematical techniques are frequently
used in science but mathematical advances in and of
themselves are not science unless they are advances in
representing the nature and behaviour of the physical
and material universe.
SME — A small or medium sized enterprise.
SME scheme — You can only claim under the scheme
for SMEs if your company meets the definition of a SME
for R&D tax relief purposes. You can only claim R&D tax
relief as a SME if your company is a going concern and
not in administration or liquidation when you make your
claim. If you’ve made a claim and the company then
ceases to be a going concern you can’t get a tax credit.
Technology — Technology is the practical application
of scientific principles and knowledge, where ‘scientific’
is based on the definition of science above.
Webinar — HMRC have a number of seminars and
presentations which take place on the internet. You can
register your interest to view these on the HMRC website.
Issued by
HM Revenue & Customs
November 2016 © Crown Copyright 2016