Can Your Company Claim R&D Tax Relief?

Research and Development (R&D) tax relief can reduce your company's corporation tax bill or provide a cash payment if your business is working on innovative projects. But many company directors are unsure whether their work qualifies. This article explains what counts as R&D for tax purposes and how to know if your company can claim.

Who can claim R&D tax relief?

Only companies that pay UK Corporation Tax can claim R&D tax relief. This means:

• Limited companies registered in the UK
• Companies working on projects that involve science and technology

Sole traders and partnerships cannot claim this relief, as it's specifically a corporation tax benefit.

What counts as R&D for tax purposes?

R&D for tax purposes has a specific meaning that's different from everyday use. Your project must seek to achieve an advance in a field of science or technology by overcoming scientific or technological uncertainty.

Science and technology explained

Science means the systematic study of the nature and behaviour of the physical and material universe. From 1 April 2023, mathematical advances also count as science for R&D purposes, whether or not they relate to the physical world.

Technology is the practical application of scientific principles or knowledge.

Your project cannot claim R&D relief if the advance is in the arts, humanities, or social sciences (including economics).

What is an advance in science or technology?

An advance means creating or improving knowledge or capability in a way that a competent professional working in that field would recognise as an appreciable improvement. "Appreciable" means a genuine, non-trivial improvement – more than just a minor or routine upgrade.

Your project could involve:

• Creating a new process, material, device, product or service that increases overall knowledge or capability
• Appreciably improving an existing process, material, device, product or service (for example, to save costs or reduce waste)
• Using science or technology to duplicate the effect of something that already exists, but in a new or improved way

Important: Your project must aim to create an advance in the overall field of science or technology, not just an advance for your own business. However, if another company has developed something similar but it's not publicly known or available, your work can still qualify as an advance.

Understanding scientific or technological uncertainty

This is the key test for R&D tax relief. Scientific or technological uncertainty exists when an expert cannot say whether something is scientifically or technologically possible, or how to achieve it, even after reviewing all available evidence.

This means:

• Your company doesn't already know the solution
• Experts in the field don't already know the solution
• The answer isn't readily available or easily worked out

You're not simply applying existing knowledge in a routine way – you're trying to solve a problem where the solution is genuinely uncertain.

Proving your project qualifies

You need to be able to explain the work you did to overcome the uncertainty. This should include:

• A description of the successes and failures during the project
• Evidence that a competent professional in the field could not easily work out the solution
• Details of why other attempts to solve the problem had failed

You'll need input from a competent professional – someone with relevant scientific or technological expertise in the field your project relates to. This person should be able to identify and explain the scientific or technological uncertainties your project aimed to resolve.

Checking if your project qualifies

HMRC provides an online tool to help you check whether your project involves R&D for tax purposes. The tool asks questions based on your project's specific facts and gives HMRC's view on whether it qualifies.

Before using the tool, you should:

• Have details of your project ready
• Involve a competent professional, as they'll need to answer some questions
• Read the guidance links provided within the tool

HMRC recommends that you save or print your result and keep a record of the information you used to answer each question. This will help when making your claim and if HMRC opens a compliance check.

If your answers are based on your project's facts and you can clearly support and explain them, HMRC is unlikely to disagree that your work involves R&D activities. If they do, they'll explain why.

What happens if your project qualifies?

If your project qualifies as R&D for tax purposes, this doesn't automatically mean you can claim tax relief on all R&D-related costs. Each type of cost has specific rules about what you can and cannot claim.

Your next step is to check what R&D costs you can claim. These might include staff costs, subcontractor costs, materials, and certain other expenses directly related to the R&D project.

Record keeping

Good record keeping is essential for any R&D claim. You should maintain:

• Documentation explaining the scientific or technological uncertainties
• Records of how you attempted to overcome them
• Details of the costs incurred
• Evidence from your competent professional

This documentation will support your claim and help if HMRC asks questions about it.

Sources

• Check if a project includes activities that qualify as Research and Development for tax purposes
• Check if you can claim Research & Development (R&D) tax relief

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.