Research and Development (R&D) tax credits, or R&D tax relief, are a type of corporation tax relief that reduces the effective cost of R&D for companies. They are a government incentive designed to encourage increased private sector investment in R&D.
R&D tax credits were first introduced in 2000, initially for small- and medium-sized enterprises (SMEs), with a scheme for large companies introduced two years later. A new, merged Research and Development Expenditure Credit (RDEC) scheme and Enhanced R&D Intensive Support (ERIS) for loss-making R&D-intensive SMEs has recently been established, replacing the separate schemes previously based on business size.
To qualify for R&D tax relief, a project must seek an advance in a field of science or technology. Companies can submit details of their qualifying R&D expenditure to HMRC and claim relief through their regular tax returns.
R&D tax reliefs are widely considered to be an effective, broad-brush incentive of private sector innovation. In principle, R&D tax credits encourage companies to invest in developing new technologies and services, delivering social returns and economic spillovers, as well as supporting their commercial success.
An important part of their success in leveraging increased private investment in R&D has been their stability and predictability. Discourse within the R&D community has emphasised that recent successive policy changes to R&D tax credits have led to a lack of clarity and certainty for businesses and noted that the definition of R&D for tax relief purposes has struggled to keep pace with developments in new and emerging technologies.
Further reading
GOV.UK — R&D tax relief: the merged scheme and enhanced R&D intensive support
Centre for Economic Performance — How effective are R&D tax incentives? Reconciling the micro and macro evidence
Campaign for Science & Engineering (CaSE) — Backing Business R&D: Incentivising continued investment in UK innovation
Centre for Economic Performance — A Toolkit of Policies to Promote Innovation
This entry was written by Florence Young. Florence is the Public Opinion and Policy Officer at the Campaign for Science and Engineering (CaSE).