What are R&D tax credits?

Research and development (R&D) tax credits are a UK government incentive designed to encourage businesses to invest in a scientific or technological advancement. 

R&D tax relief is intended to support companies in the UK who are developing new products, processes or services, or making appreciable improvements to existing ones. To qualify for this incentive, the work must seek to achieve an advance in science or technology and involve the resolution of scientific or technological uncertainty. 

These credits typically cover expenditure related to research and development, such as:

• Staff pay costs
• Software used in R&D
• Consumable items and materials
• Subcontractor payments
• Externally provided workers (EPWs)

Prior to 1 April 2024, the R&D relief regime consisted of two main schemes: the SME scheme and RDEC (Research and Development Expenditure Credit). The scheme available depended on factors such as company size, project circumstances and the nature of the qualifying expenditure. 

For accounting periods beginning on or after 1 April 2024, most claims fall under the Merged R&D Scheme, which was introduced to simplify the relief framework and align the treatment of qualifying expenditure across businesses. The merged scheme also introduced revised rules relating to contracted-out R&D and subcontracted work. 

Loss-making, R&D-intensive SMEs may instead access Enhanced R&D Intensive Support (ERIS), which offers a higher effective rate of support where a substantial proportion of the company’s total expenditure relates to qualifying R&D activity. 

As with all areas of R&D tax credit relief, eligibility depends on the specific facts of the project, the activities undertaken and the expenditure incurred. Businesses should ensure that qualifying activities and costs are appropriately identified and supported before making a claim.