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

While the relief is relatively accessible, it has come under increasing scrutiny recently, with several legislative changes and an increased focus on compliance by HMRC.

In this article, you’ll learn who qualifies for R&D tax credits, how they work and the requirements for a successful claim. We also cover the latest changes to UK R&D tax credit schemes, including the merger of the SME and large company RDEC schemes.

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, they must be subject to Corporation Tax and have conducted research and development activities that satisfy the legal definition of ‘eligible R&D’ for tax purposes.

How do R&D tax credits work?

HMRC applies R&D tax relief 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 spend 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?

Historically, there have been two primary R&D tax relief schemes for UK companies: the SME scheme and the RDEC (Research and Development Expenditure Credit). 

However, for accounting periods starting on or after 1 April 2024, the SME and RDEC schemes have merged. This has been done to streamline the relief and help control its overall cost. 

Below is a summary showing the rates of relief under the two “old” schemes and the merged scheme.

*The post-tax RDEC/Merged scheme rates from 1 April 2023 will vary depending on the level of taxable profits a company has and the corporation tax rate applied to those profits. The Net RDEC at the main rate of CT (25%) is 15%; for the small companies CT rate (19%) is 16.2%; and for companies paying tax in the marginal rate band (26.5%) is 14.7%.

**Loss-making R&D intensive companies are those whose qualifying R&D expenditure constitutes at least 40% (from 1 April 2023) or 30% (from accounting periods starting on or after 1 April 2024) of total expenditure (splitting accounting periods as required). Total expenditure for this purpose will be calculated from the total expenses figure in the profit and loss (P&L) account, adjusted by adding any amount of expenditure used under s1308 Corporation Tax Act (CTA) 2009 and subtracting any amount not deductible for CT purposes.

For the 2022/23 and 2023/24 tax years, if you have a year-end that straddles 1 April, you will need to do a split period calculation for R&D costs to ensure you apply the correct rates of relief. 

In cases where apportioning costs is challenging, HMRC may accept a blended rate of relief for a period that straddles a rate change if it doesn’t materially impact your claims.

Which qualifying costs can a company claim R&D tax relief on?

You can claim R&D tax relief on several development costs, including staff, contractors and consumables. The amount you can claim back varies depending on the cost and whether you claim SME R&D tax relief or RDEC.

*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.

Subcontracted costs are one area where the SME regime rules have been brought into the merged regime.

Currently, companies claiming under RDEC can only claim for the costs of outsourcing their R&D when the work is subcontracted to a limited number of “qualifying bodies”, such as universities, individuals or partnerships. SMEs, however, can claim 65% of the costs of most subcontractor payments.

Under the merged R&D regime, all companies will be able to claim for qualifying subcontractor payments where the principal ‘intended or contemplated’ at the time the contract was entered into, that the subcontractor would be required to undertake R&D to satisfy the contract.

Standalone SME R&D intensive scheme

It had previously been announced that loss-making SMEs whose R&D expenditure constitutes at least 40% of their total expenditure, incurred on or after 1 April 2023, would continue to receive relief in the form of an SME tax credit. This will continue and give an effective rate of relief of 26.97% of allowable R&D expenditure. 

This standalone scheme will run alongside the new merged scheme outlined above although, as far as possible, the same rules will apply as under the merged scheme. For example, the rules on qualifying expenditure and the PAYE/NIC cap on repayable credits will be the same.

How to apply for R&D tax credits

As discussed in previous articles, for any R&D claims submitted after 8 August 2023, an Additional Information Form (AIF) is required to be submitted with a claim. A company must send HMRC an additional information form before the corporation tax return is submitted. If this process is not followed, HMRC will remove the R&D tax relief from the company tax return.

You will need the following details to complete 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;
    
  • 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 a company representative, like the 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, 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 identify errors.

Frequently asked questions

What are R&D tax credits?

Research and Development (R&D) tax credits are a form of Corporation Tax relief that can reduce your Corporation Tax liability or result in a payable tax credit. The tax credits support companies working on innovative science and technology projects.

How do R&D tax credits work?

R&D tax credits are a government initiative to incentivise technological development, productivity and economic growth. Companies that spend money on developing new technologies or processes receive a reduction and may be eligible for relief in the form of a cash credit or corporation tax reduction. 

To be eligible, you must work on a project that relates to your trade, attempt to advance overall knowledge in a field, and attempt to overcome technological or scientific uncertainty. These activities can’t have been easily completed by a competent professional in the field.

Who can make R&D tax credit claims?

Many companies working on innovative projects may be eligible for R&D tax credits assuming they meet the following criteria: they are a limited company trading in the UK, have a project that meets the R&D definition, and have an eligible expenditure liable to Corporation Tax.

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.