Research and Development (R&D) Tax Relief

Research and Development Tax Relief

Research and Development (R&D) Tax Relief

What is R&D tax relief?

R&D tax relief was introduced in 2000 in order to incentivise companies to undertake innovation and technological advances in the UK.

R&D tax relief is available where a company aims to achieve an advance via the resolution of scientific or technological uncertainty.

Although R&D tax relief has been around for over 20 years it is often overlooked; Or indeed incorrectly claimed by inexperienced business owners or over-enthusiastic R&D ‘specialists’. With HMRC placing claims under increasing scrutiny, it is paramount that full professional advice is established before any documents are filed.

 

How can it benefit your business?

There are two schemes for claiming R&D relief. Firstly, there is the more generous SME scheme designed for small and medium-sized businesses and the Research and Development Expenditure Credit (RDEC) Scheme which is designed for larger businesses and those precluded from the SME scheme.

Under the SME scheme, the relief is given as an enhanced deduction (230% of qualifying costs prior to 1 April 2023 reduced to 186% thereafter) that reduces the taxable profits / increases the trading losses of the company.  For example, where qualifying costs are £100,000 the company gets an additional deduction of £130,000 to make an enhanced deduction of £230,000 when the year end is prior to 1 April 2023.

Company year ends ending after April 2023 will see a hybrid of the two rates for expenditure before and after 1 April 2023. For example, were the qualifying costs post

1 April 2023 the company would receive an additional £86,000 thereby resulting in an enhanced deduction of £186,000. This is less of a reduction than at first it seems as it is counterbalanced by the increase in Corporation Tax Rates at the same date from 19% to an assumed main rate of 25%.

A profit-making SME can receive a reduction in their tax liability of up to 43.7p for every £1 they spend on R&D activities before 1 April 2023 and 46.5p after.

Where a claim creates a loss then the amount of the loss that is related to the R&D claim can be surrendered for a tax credit equal to 14.5 percent of the loss surrendered if prior to 1 April 2023 and 10% post this date.

Furthermore, a loss-making SME can surrender their losses for a cash credit from HMRC of up to 33.35p for every £1 spent on R&D activities (14.5% of the loss surrendered), this reduces to 18.6p from 1 April 2023, however in a further change in the legislation following the Finance Bill 2024 the 14.5% rate will continue to apply post 1 April 2023 if at least 40% of the SME’s total expenditure relates to R&D.

A requirement to make a notification of a claim where R&D has not previously been claimed in the previous three accounting periods and a time limit of making the notification of a claim is six months after the end of the period of account has been introduced for accounting periods starting on or after 1 April 2023

The actual time limit for making the claim is two years from the end of the period of account where no longer than 18 months. In other cases, the limit will be 42 months from the first day of the period of account.

From 8th August 2023, legislation has given HMRC the power to require additional information to support a claim and may also include a requirement for claims to be made digitally and will have to include details of any agent who has advised.

 

R&D undertaken overseas

The Chancellor has supplied his view that the government remains committed to refocusing support towards innovation in the UK, ensuring that the UK more effectively captures the benefits of R&D funded by the reliefs. However, he recognised that there are some cases where it is necessary for the R&D to take place overseas.

The government has issued draft guidance that clarifies that expenditure on overseas R&D activities can still qualify where it meets the three factors and/or there is a regulatory requirement for this work to be carried out overseas.

There are 3 factors which must all be considered for this purpose.

  1. Conditions are not present in the UK
  2. The conditions are present in the location R&D is undertaken
  3. It would be unreasonable to replicate the conditions in the UK

A regulatory requirement or other legal requirement that activities must take place outside of the UK could apply to clinical trials for example. Where it is necessary to carry out one or more activities of the R&D project outside the UK this does not mean that other activities of the project meet the conditions.

 

Cap on credit

The government announced a cap on the amount of credit that a company can claim for periods starting on or after 1 April 2021. The cap is £20,000 per period plus 300% of the PAYE and NIC payable for the period. However, this will not apply where certain tests are met. These tests require that a company’s employees are creating, preparing to create or actively managing intellectual property (IP) and that its expenditure on work subcontracted to, or externally provided workers provided by, a related party is less than 15 percent of its overall R&D expenditure.

Where the cap applies, the balance of the loss is available to be carried forward as a trading loss.

SME R&D tax relief can be claimed on revenue expenditure across the following areas:

  • Staff costs (to include all remuneration costs other than benefits in kind, employer NIC and employer pension for employees and directors directly or actively involved in R&D. If partly engaged then these costs must be apportioned)
  • Subcontractor costs (restricted to 65 percent)
  • R&D Subcontracted out by the company,( however from April 2024 if performed overseas there may be conditions to meet)
  • Externally provided workers (restricted to 65 percent), a restriction to externally provided workers may apply for accounting periods beginning on or after 1 April 2024Consumable items (e.g. water, heat, light and power, and materials ‘consumed’ in the R&D process).
  • Data Licences and cloud computing services (Incurred in accounting periods beginning on or after 1 April 2023, where directly employed in R&D, if partly employed then an apportionment is made) There are some exclusions for example if there is a right to enrichment or to publish/share data and therefore advice should be sought.
  • Software (incurred on software employed directly on R&D and apportioned if partly applicable)

 

Who qualifies?

A company can claim under the SME scheme provided the company or group has:

  • fewer than 500 employees and either a
  • turnover of less than £100m, or
  • gross assets of less than £86m.

Where a company grows and fails to meet the SME test for the first time, new relief allows the company to retain SME status for a further year.

The RDEC scheme is primarily used by large companies (being a company that is not an SME) but is also used when SMEs are prevented from using the more generous SME scheme (for example if they receive a grant or subsidy or have carried out subcontracted R&D on behalf of a large business).

The RDEC is equal to 13% of the qualifying R&D spend prior to 1 April 2023 and 20% thereafter. For a profit making company the credit is offset against the corporation tax liability for the period. However, the credit is also taxable at the normal corporation tax rate (currently 25%, previously 19%) which effectively means the benefit is worth up to 10.53p for every £1 spent on R&D activities before 1 April 2023 and 15p thereafter. If the company is loss making the company can claim a cash tax credit which is restricted by a notional corporation tax charge (currently up to 25%, previously 19%) to give a cash tax credit equal to 15% which was previously 10.53% of the qualifying expenditure.

The RDEC can be claimed on revenue expenditure across the following areas:

  • Staff costs (to include all remuneration costs, employer NIC and employer pension, benefits in kind are not included) R&D subcontracted to the company by a large company or any person otherwise
  • Subcontractor costs – but only if the subcontractor is individual, partnership or qualifying body.
  • Externally provided workers (restricted to 65 percent) relief may be restricted for accounting periods beginning on or after 1 April 2024.
  • Consumable items (e.g. water, heat, light and power, and materials ‘consumed’ in the R&D process).
  • Software
  • Data licences and cloud computing services (for accounting periods beginning after 1 April 2023)

Is your business eligible to claim?

It is important to remember that to claim this relief, you don’t have to work in a lab or wear a white coat. We have submitted successful claims for IT & Software businesses, Food & Beverage businesses, as well as the more obvious Healthcare & Medical, Manufacturing, and Engineering businesses.

Broadly speaking, the relief applies to companies undertaking projects which aim to seek an advance in science or technology. It could be that a competitor may have aimed to achieve a similar advance. Many businesses rule themselves out as a result of this. However, if the knowledge on how to achieve the advance is not in the public domain you can still make a claim.

 

Case Studies

“Hawsons provided a very professional and expert service to us in making successful claims for R&D tax credits.  We were very impressed and have no hesitation in highly recommending them”. 

Background

This company started trading in 2014 with the aim of developing 3D sensor technology for use in a number of areas to include robotics, medicine, and aviation.

Shortly after the company commenced trading the directors of the company met with us to discuss the nature of developments being undertaken and the advances sought.

How we helped

We took the time to understand that the nature of the developments being undertaken and the future aims of the company. We advised the company that the projects being undertaken would qualify for R&D tax relief and we explained to the company how and why the projects met the eligibility criteria for the relief.

We advised the company about the nature of the relief and what expenditure qualified for the relief. As the company was in its early stages this was extremely useful as it enabled the accounting systems to be designed to capture the financial data required for the R&D tax relief claims.

Following the completion of the company’s first accounting period, we prepared the R&D claim for the company and ensured that all qualifying expenditure was included so that the claim was maximized. We then included the claim in the company’s corporation tax return and submitted this to HMRC with the relevant disclosures.

Outcome

We have now been acting for the company for 6 years and have submitted a number of successful claims to HMRC.

This has resulted in the company receiving R&D tax credits which it has invested in developing its sensor technology.

See the full case study here

“Hawsons assisted us with our Research and Development tax relief claim.  We were very impressed by the knowledge and expertise shown by Hawsons throughout the claim process and we would not hesitate in recommending them to other businesses.” 

Background

This company supply, install and maintain electronic point of sale (“EPOS”), warehouse management (“WMS”), and retail management systems.  The company developed an innovative new cloud-based ordering platform that retailers and wholesalers could access from any online device.

We met with the team at their Buxton site to discuss the work undertaken during the year and what would qualify for R&D tax relief.

How we helped

We took the time to understand the nature of the activities being undertaken.  We advised the company which projects would qualify for R&D tax relief and we explained how and why the projects met the eligibility criteria for the relief.

We advised the company about the nature of the relief and about what types of expenditure qualified for the relief.

We prepared a technical report for the company as part of the claim and ensured that all qualifying expenditure was included so that the claim was maximised. We provided the company with a copy of the claim and supporting schedules before it was sent to HMRC and answered any questions that arose.  We then included the claim in the company’s corporation tax return and submitted this to HMRC with the relevant disclosures.

Outcome

We have submitted a series of successful R&D claims for the company.

This has resulted in significant corporation tax savings for the company which has helped the company grow.

We have experienced qualified experts

We have experienced qualified experts at our offices in Sheffield, Doncaster, and Northampton.

Stephen Charles, Tax Partner (Sheffield and Doncaster)

Stephen Charles is a Tax Partner at Hawsons specialising in corporate and business taxation. He is a qualified chartered accountant and chartered tax adviser and previously worked at a national firm before bringing his wealth of experience to Hawsons in 2007. He has been involved in many R&D tax relief claims over the years and will oversee all R&D claims at the Sheffield and Doncaster office.

Craig Walker, Tax Director (Sheffield and Doncaster)

Craig is a Tax Director at Hawsons and is a Chartered Tax Advisor and member of the Association of Taxation Technicians. Craig has gained a huge amount of experience working at a large regional firm of Chartered Accountants and a top 20 firm before joining Hawsons in 2016. Craig is heavily involved in all R&D tax relief claims at our Sheffield and Doncaster offices.

Aaron Hemmington, Tax Partner (Northampton)

Aaron is a Tax Partner at Hawsons and is a Chartered Tax Adviser and a member of the Association of Taxation Technicians. Aaron trained with a national firm of accountants gaining a huge amount of experience before moving to Hawsons and subsequently becoming Partner. Aaron will oversee all R&D claims at the Northampton office.

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R&D Tax Relief FAQs

What is the time limit for claiming R&D tax relief?

The time limit is two years from the end of the accounting period in question if the period of account is less than 18 months. In other cases the limit will be 42 months from the first day of the period of account.

How is R&D tax relief claimed?

The claim is made in the corporation tax return and computations of a company. It is necessary to submit a financial and technical disclosure with the return setting out why the company qualifies and how the claim amount was calculated.

HMRC has introduced a requirement to make a notification of a claim where R&D has not previously been claimed in the previous three accounting periods. The time limit for making the notification of a claim is six months after the end of the period of account. This has been introduced for accounting periods starting on or after 1 April 2023.

From 8 August 2023, legislation has given HMRC power to require additional information to support an R&D claim and may also include a requirement for claims to be made digitally and include details of any agent who has advised.

My company is an SME and it has been contracted by another SME to carry out R&D on one its projects. Can my company claim relief?

No, if a company acts as a subcontractor on an R&D project for another SME it cannot claim any R&D relief.

My company is an SME and it has been contracted by a large company to carry out R&D on one its projects. Can my company claim relief?

Yes, it can claim relief but only under the RDEC scheme.

My company is in receipt of a grant which it uses to fund R&D expenditure. Does this affect our R&D claim?

Yes, it does affect the claim. As it stands the position depends on whether the grant is a ‘Notified State Aid’ or not (but see FAQ no.11). If it is a ‘Notified State Aid’ the whole claim will fall under the RDEC scheme. If the grant is not a ‘Notified State Aid’ then the expenditure funded by the grant will fall under the RDEC scheme and the balance of expenditure (if any) will fall under the SME scheme.

Do R&D tax credits apply to an LLP, partnership or a sole trader?

No, as it stands R&D reliefs only apply to companies.

Can we include the cost of materials used to build a prototype in the R&D claim?

Yes, provided the prototype is not subsequently sold or transferred.

How do we know if our company is carrying out qualifying R&D?

If your company is creating a new or improved product, process, or service and is having to resolve scientific or technological uncertainty in the process, your business might be carrying out research and development.

Can my company include subcontractors in its R&D tax relief claim?

Yes, a SME is able to claim 65% of the costs paid to any subcontractor for qualifying activities. Where a company falls under the RDEC scheme, the subcontractor must be an individual, partnership of individuals, or a qualifying body for the expenditure to be eligible. However, in this case, it can claim for 100% of the costs paid to the subcontractor for qualifying activities.

 

It is expected that restrictions on overseas subcontractors will come into affect 1 April 2024. Final details have yet to be disclosed.

What are externally provided workers?

These are temporary workers provided by other entities such as employment agencies or connected companies.

It is expected that restrictions on externally provided workers will come into affect 1 April 2024. Final details have yet to be disclosed.

 

Has Brexit had an impact on R&D tax credits?

The R&D legislation was originally drafted so that it was compliant with the EU state aid rules. The UK has now left the EU but as it stands the R&D legislation has not been fully updated. Therefore, in relation to grant funded R&D the legislation still looks at whether the grant is a notified state aid or not. State aid rules have however been replaced by a new UK subsidy control system from 4 January 2023.

R&D Tax Relief News