Check if you’re eligible and what you can claim
A guide to R&D tax relief, Patent Box relief and innovation funding grants
R&D tax relief, the Patent Box scheme and innovation funding grants are all designed to help set you on a cycle of innovation and IP exploitation so that you and the country can grow and prosper.
You may believe that you don’t carry out R&D or create innovations – you simply solve problems in your business as they arise. Yet there are plenty of activities SMEs carry out each year that qualify for tax relief or further funding. Or you may have put it off as it seems too complicated or time-consuming to bother.
Whatever the reason, you could be losing out on non-repayable funding that the government wants you to claim. Doing so helps you innovate and achieve their grand ambition for the UK to become the most innovative country in the world.
We’ve put together this guide to help you see what activities are eligible and how much you could claim.
Source: The UK Longitudinal Small Business Survey: SME Employers, UK- 2019
R&D tax relief
R&D tax relief is the government’s generous cash incentive for companies who have attempted to create new or improved products, processes, devices, materials or services. You can therefore claim even if your R&D activity is unsuccessful, so long as it qualifies.
The returns can be very generous – up to 33% of your qualifying project costs may be returned in cash.
What qualifies for R&D?
Your project must seek an advance in a field, science or technology, by resolving scientific or technological uncertainties.
The key test
Would a competent professional working in your field be unable to readily deduce whether the advance you’re seeking is feasible to achieve, or how to achieve it in practice?
It’s not enough to create an advance for your company alone. Eligible examples include:
Research projects that seek new knowledge or capability for your field.
Developing new products, devices, materials, processes or services which provide an advance in overall knowledge capability.
Making appreciable improvements to existing products, etc, through technological change.
Duplicating an existing product, etc, in a new or appreciably improved way.
Sector-specific examples of qualifying activities
There are plenty of instances in which you may unwittingly be carrying out qualifying R&D activity whilst trying to find solutions to problems in your business.
How much can you claim for R&D tax relief?
How much you can claim depends on which R&D tax relief scheme your activity falls into. This depends on the size of your company and how your activity has been carried out or funded.
The SME scheme
Who it applies to
SMEs that have carried out their own R&D. SMEs must have a headcount of less than 500 and either:
Turnover of less than €100m; OR
Balance sheet total of less than €86m
What you can claim
You can claim between 19% and 33% tax relief for qualifying expenditure (which is “boosted” by 30%).
The effective mean average is 25-33%.
So for every £1,000 spent, you effectively receive between £250 to £330 back.
The RDEC Scheme
Who it applies to
Large companies
SMEs carrying out R&D on behalf of large companies
SMEs whose R&D has been grant-funded or subsidised
What you can claim
Receive an effective cash benefit of 10.53% on all qualifying expenditure (13% relief minus 19% corporation tax).
So for every £1,000 spent, you effectively receive £105.30 back.
What counts as qualifying expenditure?
Staffing costs
Gross salary, employers’ NI contribution, employers’ pension contribution, reimbursed expenses, bonuses (but not dividends or BIK).
Externally provided workers
You can claim for externally provided workers such as agency staff or employees of a fellow group company. This is restricted to 65% of expenditure where the EPW is not a connected party.
Subcontractors
You can claim 100% relief for connected subcontractors but it’s restricted to 65% for unconnected subcontractors. Payments to Ltd company subcontractors do not qualify under the RDEC scheme.
Software costs
Licences and purchase costs relating to software which facilitates R&D.
Consumables
Materials or components which are transformed or consumed in R&D activity.
Volunteers
Payments to clinical trial volunteers.
Patent Box Tax Relief
The Patent Box is a regime that allows you to claim a reduced 10% corporation tax on any profit you make for patented inventions – even if they form a small part of a larger product. The relief can provide you with extra cash flow for 20 years.
What patents qualify?
Any patents you’ve registered at any time are covered but they must have been granted by the:
UK Intellectual Property Office
European Patent Office
Other EEA states with similar patent criteria to the UK
Can you claim?
You can claim if you:
Are the legal owner (This can include patents developed under a partnership, joint venture or cost-sharing agreement.)
Hold an exclusive licence to commercially exploit a patent (even if it’s restricted to particular fields or territories).
Have performed a significant activity to develop the patented invention or its application. (This can be before or after it was registered.)
What qualifies as income?
The relief covers any income you make, whether that’s in the UK or worldwide. You can claim for income generated in the following ways:
Sale of patented items or those that incorporate a patent
License fees
Proceeds from the sale of patents
Compensation for infringements
Innovation Grants
Innovation grants are effectively competitions that you can apply for to help fund your R&D or get it to market. They run throughout the year and we will always explore whether you may meet the criteria. (Although, as it’s a competition, whether you are successful depends in part on how strong you are compared with the other applicants.)
There can be significant differences between funding programmes but most seek to support project concepts that:
Address an unmet need
Deliver a disruptive or breakthrough new solution
Are enabled by novel science and technology
Have global market potential
In addition to the above, many funding calls also have additional specific criteria, such as:
A market, challenge or technology focus
Open only to certain types of organisation
Open to projects that start or finish at a specific development stage (readiness level, etc).