Step by Step Guide to Claiming R&D Tax Credits

Research and Development (R&D) tax credits are a popular UK incentive scheme aimed at encouraging innovation. The idea is that if your business is working on new products, processes or services, or making notable improvements to existing ones, you could be eligible to reclaim a hefty percentage of any R&D expenses incurred. Depending on how you claim them, these credits can help reduce your Corporation Tax bill or to provide a cash injection for future growth and research.

However, it’s worth highlighting that R&D tax credits have been under heavy scrutiny in recent years. HMRC estimates put the value of fraudulent R&D claims between 2020 and 2024 at 2020 £4.1 billion, with an attendant increase in denied or removed claims in recent years.

In this article, we walk you through everything you need to know about claiming R&D tax credits, how to maximise your chances of success and explore alternatives available. 

What are R&D tax credits?

R&D tax credits are a financial incentive designed to reward businesses for taking on the risks of innovation. They’re particularly helpful for small and medium-sized enterprises (SMEs) working to solve complex technical or scientific challenges. Even better, you can claim credits whether or not your project was successful. What matters is the effort and uncertainty involved​​.

Why do R&D tax credits matter?

R&D tax credits deliver tangible benefits for businesses in the form of tax savings on capital invested in qualifying activity, helping them grow faster and reduce their tax obligations.

• Eligible businesses can reclaim up to 27% of qualifying R&D costs, depending on their circumstances​.
• The scheme supports innovation across industries, from software development and manufacturing to engineering and beyond​​.
• It can help businesses tackle big challenges with less financial risk, giving them the freedom to invest in long-term growth.

Step 1: Is your business eligible?

To qualify for R&D tax credits, your project must meet HMRC’s criteria:

1. Advance science or technology: Your work must aim to achieve something that isn’t readily available in the field.
2. Solve uncertainty: You must be tackling problems that a competent professional in the field couldn’t easily solve​​.

This isn’t limited to 'groundbreaking’ discoveries. For example, improving an existing manufacturing process to make it more efficient can qualify as R&D if it involves overcoming technical challenges​.

Common examples of eligible R&D work could include:

• Developing new software to automate tasks or process data in novel ways.
• Creating prototypes for innovative products.
• Experimenting with materials to improve durability or reduce waste​​.

Step 2: Understand the right scheme for your business

The landscape for this scheme has changed in recent years and on 1st April 2024, the UK’s R&D tax relief system transitioned to a simplified structure. 

• Merged scheme for R&D reliefs: This replaces the SME Scheme and the R&D Expenditure Credit (RDEC), offering a unified structure for companies of all sizes. Businesses now calculate relief based on qualifying R&D expenditure, regardless of their size.
• Enhanced R&D Intensive Support (ERIS): This is specifically designed for loss-making, R&D-intensive SMEs. To qualify, at least 30% of a company’s total expenditure must relate to R&D, making it a lifeline for innovation-driven businesses with high operational costs.

The merged scheme simplifies claims, but SMEs may see reduced benefits compared to the previous structure. However, ERIS ensures extra support for smaller businesses heavily focused on R&D. 

Step 3: Identify what costs you can claim

Here’s where R&D tax credits shine: a wide range of costs can qualify, including:

• Staff costs: Salaries, pensions, and NICs for employees directly involved in R&D.
• Subcontractor and freelancer fees: When work is outsourced to experts.
• Consumables: Materials, utilities, and resources used in the R&D process.
• Software and cloud costs: Licenses or services needed for innovation​​.

These costs can add up quickly, making even a modest R&D project eligible for substantial relief.

Step 4: Build your claim

Successful claims rely on robust documentation. To give your application the best chance of approval:

1. Prepare a technical report: Detail your project’s objectives, challenges, and outcomes. Focus on how your work meets the definition of R&D.
2. Track costs carefully: Break down expenses and link them to specific R&D activities.
3. Submit supporting forms: Use the supplementary CT600L form with your Company Tax Return​​.

If you’re claiming for the first time, HMRC’s Advance Assurance scheme can provide peace of mind. It gives smaller businesses confirmation that their claims will be accepted without further scrutiny​.

Step 5: Submit your claim 

R&D claims are submitted as part of your annual Corporation Tax return. If you’re unsure how to proceed, seeking specialist advice from an R&D consultant or tax expert can simplify the process, though it’s worth noting that specialist R&D consultants have become a focus area for HMRC due to a period of unscrupulous advisors submitting high volumes of claims that were not always compliant.

What are the alternatives to R&D tax credits?

While R&D tax credits offer significant benefits, delays in processing claims and the uncertain prospect of whether you’ll qualify bring risks. This is especially true if you have already made investments in anticipation of receiving a credit, which could leave you out of pocket.  

If your business needs funds sooner, an iwoca Flexi-Loan can help you access funds quickly, with flexible terms and full control.

• Fast funding: Borrow up to £1 million in as little as 24 hours and repay in up to five years.
• Flexible terms: Only pay for what you use, and repay early without fees.
• Scalable support: Top up your loan as your needs evolve​.

For example, a tech startup waiting for R&D credits might use an iwoca loan to hire developers or buy equipment, keeping their project on track without waiting months for HMRC payouts.

Whether you’re diving into new R&D opportunities or simply managing the ups and downs of business cash flow, iwoca is here to help you succeed

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