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How do I claim R&D tax credits?

by Christian Roberts

The Research & Development Tax Relief scheme provides valuable tax relief for companies who work on innovative projects in science and technology. 

Whilst the relief is relatively accessible it has come under increasing scrutiny in more recent times, with a number of legislative changes being made and an increased focus on compliance by HMRC.

Does my business qualify for R&D tax credits?

Companies can claim for qualifying projects. Generally, that means a project must:

  • relate to your company trade (current or future)
  • attempt to achieve an advance in the overall knowledge or capability in a field of science or technology
  • attempt to overcome technological or scientific uncertainty
  • not have been easy to work out by a competent professional in the field.

Although the scheme is open to all UK companies in any industry or size, the company must be subject to Corporation Tax. Additionally, the company must have conducted research and development work that satisfies the legal definition of ‘eligible R&D’ for tax purposes.

How do R&D tax credits work?

R&D tax relief can be applied as either a repayable tax credit (i.e., repayment from HMRC) for loss making companies, or a Corporation Tax reduction for profit making ones. The relief is proportional to the amount you have spent on R&D. The more you invest in R&D, the more valuable the tax incentive may be.

How much are R&D tax credits worth?

There are two main R&D tax relief schemes in place for UK companies: the SME scheme and the RDEC (Research and Development Expenditure Credit).

Any firms applying for R&D tax credits using the SME scheme must have fewer than 500 employees and have either an annual turnover of no more than €100 million or a balance sheet under €86 million. Additionally, there are further requirements, such as the R&D cannot be subsidised by any other party (including the receipt of grants).

From 1 April 2023, the SME scheme’s additional deduction rate decreased from 130% to 86%.

If your company is profitable, this reduction may be offset somewhat by the corporation tax rise. Companies with profits in excess of £250,000 will be liable to the main rate of 25%, and those with profits between £50,000 and £250,000 will be paying somewhere between 19% and 25%.

Therefore, based on £100,000 of R&D costs you could potentially receive up to £21,500, or a minimum £16,340 if the company is liable to corporation tax at the lower rate of 19%.

For loss making companies, the rate at which companies can utilise an enhanced loss is being reduced from 14.5% to 10%, unless the company is “research intensive”, this means at least 40% of the company’s expenditure consists of qualifying R&D expenditure. As a result of this, R&D tax credits will therefore attract tax relief of 18.6%, or 27% if the company is “research intensive”.

RDEC is available for all companies which do not qualify under the SME scheme. From 1 April 2023, the RDEC credit for large companies will increase from 13% to 20%. This credit is taxable, so the actual benefit is increasing for most companies is between the range of 10.53% to 15%.

Which costs can I claim R&D tax relief on?

You can claim R&D tax relief on a number of different development costs, including staff, contractors and consumables. How much you can claim back varies depending on the cost and whether you are claiming for SME R&D tax relief or RDEC.

Cost SME Scheme RDEC Scheme
Direct staff costs 100% 100%
Externally provided workers * 65% 65%
Subcontracted R&D * 65% 0%**
R&D consumables 100% 100%
Software 100% 100%
Clinical trial volunteers 100% 100%
Independent research 0% 100%

*Note: there are special rules where the externally provided workers or sub-contractors are connected to the company.

**Note: some subcontractors may qualify under the RDEC scheme, such as payments to individuals.

For accounting periods beginning on or after 1 April 2023, qualifying expenditure for R&D purposes is extended to include data licence sets and cloud computing licences. There are, naturally, exemptions where the data sets are used for other commercial purposes or can be sold on. In the same way as for other qualifying expenditure, where there is mixed used of a computing licence, for example some is used for R&D and some for non-R&D activities, a reasonable apportionment can be included in the claim.

The Government originally announced that from 1 April 2023, if work was subcontracted to a third party which performs the work outside the UK, the costs of that work would not qualify for R&D tax relief. The restriction would not apply, in limited circumstances, if the R&D has to be carried on outside the UK for geographical or regulatory reasons. However, at Budget 2023, it was announced that these changes would be delayed until 1 April 2024. If a merged R&D scheme is introduced from 1 April 2024 these changes may be modified.

Updated BEIS guidelines to allow for pure mathematics to qualify as R&D

For accounting periods beginning on or after 1 April 2023, companies will now be able to claim for pure mathematics as a qualifying field of science or technology. This change is primarily aimed at ensuring certain AI and robotics related fields were not excluded from the scheme.

How are R&D tax credits claimed?

For any R&D claims submitted after 8 August 2023, a “new additional” form is required to be submitted. A company will need to send HMRC an additional information form before the company’s corporation tax return is submitted. If this process is not followed, HMRC will remove the R&D tax relief from the company tax return.

To complete the form the following details will need to be included on the form:

  • Unique Taxpayer Reference (UTR), this must match the one shown in the company tax return
  • Employer PAYE reference number
  • VAT registration number
  • Business type, for example the current SIC (Standard Industrial Classification) code
  • Contact details of either:
    • The main senior internal R&D contact in the company who is responsible for the R&D claim, for example a company director; or
    • Any agent involved in the R&D claim.
  • The accounting period start and end date for which the company is claiming tax relief, this must match the one shown on the relevant company tax return
  • Details of the qualifying expenditure
  • The number of all the projects that the company is claiming for in the accounting period and their details.
  • A description for each project including:
    • The main field of science or technology;
    • What the baseline level of science or technology that the company planned to advance;
    • What advance in that scientific or technological knowledge did the company aim to achieve;
    • The scientific or technological uncertainties that the company faced;
    • How the project sought to overcome the uncertainties; and
    • Which tax relief the company is claiming and the amount.

The additional information form can be submitted by either the representative of the company, for example company director, or the company’s registered agent. The form can then be submitted through the company or agent Government Gateway account respectively.

Requirement for R&D advisers to be named on the tax return

In addition to the above, to increase the security surrounding R&D compliance and in particular HMRC’s ability to profile R&D claims to better target its R&D activities, the R&D adviser must be named on the claim.

Senior officers at the claimant company must sign the R&D pages

Furthermore, to ensure someone senior at the company has visibility over exactly what has been claimed for, there is now an additional requirement to sign the R&D pages of the tax return. This will not extend any personal liability to the officer beyond that which already exists, but HMRC hopes this will focus the minds of decision makers when looking at the claims to make sure they are correct. We also suspect this could also drive a more aggressive penalty policy from HMRC if they do identify errors.

If you would like to discuss your eligibility for R&D tax credits or have any questions in respect of the compliance changes, please contact a member of our team.

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