Innovation (Research & Development)

Innovation is important for companies if you are breaking new ground in your industry. If you are engaging in genuinely fresh technological or scientific advances, you will find R&D tax credits of great interest. These allow companies engaged in R&D to claim a reduction in corporation tax or, where the company has incurred losses, a repayable tax credit. Many businesses have used the credits to reduce their liabilities and significantly improve cash flow.


In terms of eligibility, there are no specified sectors.  A wide range of trades may qualify, provided the company is undertaking R&D activities intending to overcome scientific or technological uncertainty. And companies are still able to claim even if they have to abort the project or are unable to solve the problem the R&D project was intended to overcome.

What expenditure qualifies?

  • Salaries, employer’s NICs and pension contributions
  • Subcontractors
  • Software (if certain criteria are met)
  • Materials and consumables including utilities
  • From April 2023: data and cloud costs

Capital expenditure is not eligible, although separate R&D capital allowances may be available.

R&D tax relief for small and medium-sized enterprises – the SME scheme

Companies are eligible for the SME scheme if they have:

  • fewer than 500 employees and either
  • turnover of less than €100m or
  • gross assets of less than €86m

Relief is available at a rate of 230%. For example, for every £100,000 of qualifying expenditure which has already been included in the company’s profit and loss account, a further £130,000 can be deducted in the tax computation.

Loss-making companies can choose to surrender the loss for a repayable credit of 14.5%, meaning that the value of the credit is 33.5p per pound (£). Alternatively, they can carry the loss forward to use against future profits, saving tax at the main rate (currently 19%).

Larger companies, and smaller companies which cannot claim under the SME scheme because they do not meet certain criteria, may claim under the R&D expenditure credit (RDEC) scheme. This credit is calculated at 13% of the company’s qualifying R&D expenditure and is taxable as trading income.

Why trust Allegro on R&D?

R&D has recently become a thorny issue for many companies, as there are no barriers to entry in this area and lots of cowboy ‘tax advisers’ have appeared on the market.

When you work with Allegro Tax, you can rest assured that you have true professionals at your side, with the qualifications, experience and testimonials to prove that you are in the very safest of hands.

“It is great when working with tech startups as we do to have a tax expert like Sarah that they only need to pay for when they need it rather than having a tax partner as an overhead on our payroll. Augments our own specialist tax expertise so that we can give the same or better service as much larger firms.”

Stephen Gibbens. Accountech Solutions Limited


R&D tax relief is a type of corporation tax relief for companies that are attempting to achieve an advance in science or technology by overcoming scientific or technological uncertainties. There are no specified sectors, meaning that companies in a wide range of sectors can claim the relief.    

Under the SME scheme, a total 230% tax deduction is available for qualifying expenses.

Your company must be aiming to overcome scientific or technological uncertainties. However, the project does not have to be successful, and aborted or ongoing projects may still qualify.

Once the R&D finishes, the remainder of the project will no longer qualify.

Yes, the SME scheme is classed as government aid. This means that if another form of aid is received in relation to the project, the amount of R&D relief available may be restricted.

If the other aid received is notified state aid, then no expenditure on the project will qualify for R&D tax relief under the SME scheme.

If the other aid received is not notified state aid, the amount funded by the grant will not be eligible for R&D tax relief under the SME scheme, but other project expenditure may still qualify.

In both cases, expenditure which does not qualify for the SME scheme may qualify under the Research and Development Expenditure Credit (RDEC) scheme for larger companies.

A company cannot claim R&D tax credits on more than €7.5m of any one project.

RDEC is a credit incentive offered by the government to promote innovation. It is given as a taxable credit on the amount of qualifying R&D expenditure payable as cash, or as an offset against the company’s corporation tax liabilities. Whilst it is a credit incentive, it is not considered as state aid.

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