Accounting for R&D tax credit and relief

Research and development tax explained

R&D tax relief, or research and development tax credit, can be a helpful lifeline for innovative companies looking to make the next big step in their field.

If the costs incurred to carry out the R&D project qualify for relief, you could be in a much better tax position than you first expected. The tax relief can be taken as a reduction in the corporation tax bill for profitable companies, or as a repayable tax credit for companies who are making a loss.

The main type of qualifying cost is the payroll cost of staff (including directors) involved in the R&D process, but you can also include certain overheads.

Eligibility and qualifying expenditure

To qualify as R&D activity, the work you undertake must aim to advance overall knowledge or capability in a field of scientific or technological uncertainty. Advances must be related to more than a company’s own capabilities or knowledge.

Generally, developing a new piece of software will qualify if it involves writing new code but not (say) producing a new website using existing technology. Traditional R&D involving the development of new physical products, such as an innovative piece of equipment, or a new recipe for food or drink, also qualifies.

Even if your project is unsuccessful, you could still claw back some of the costs you incur.

Benefits of research and development tax credits

Any reduction in the tax burden for companies is welcome, and the relief is designed as an incentive to innovators, allowing them to invest more resources in their business with all of the economic benefits it brings.

Tax refunds can be invaluable for startups. Reducing your corporation tax bill can open up more opportunities as you’ll have some capital leftover.

How to claim r&d tax credit or relief

You can claim the relief when you file your company’s taxes, once you finish preparing your accounts. This is usually handled by the company’s accountants and tax advisers, who will help the owner to establish what activity and costs will qualify before making a claim in your corporation tax return.

There is a time limit of two years after the end of an accounting year for making a claim, so if you haven’t done one and think you may qualify, there is time to make a retrospective claim.

Further information