Research and Development Tax Relief

Research and Development Tax Relief

What is Research and Development tax relief?

Research & Development (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. HMRC statistics show that only around 4 percent of companies claim the relief.

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.

Under the SME scheme, the relief is given as an enhanced deduction (currently 230% of qualifying costs) 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.

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 cash tax credit equal to 14.5 percent of the loss surrendered.

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. 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).

The government has announced a cap on the amount of credit that a company can claim for periods starting on or after 1 April 2021. The cap will be £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.

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

  • Staff costs (to include salary costs, employer NIC and employer pension)
  • Subcontractor costs (restricted to 65 percent)
  • Externally provided workers (restricted to 65 percent)
  • Consumable items (e.g. heat, light and power, and materials ‘consumed’ in the R&D process).
  • Software

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.

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 (12% for expenditure incurred prior to 1 April 2020). 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 19%) which effectively means the benefit is worth 10.53p for every £1 spent on R&D activities. If the company is loss making the company can claim a cash tax credit which is restricted by a notional corporation tax charge (currently 19%) to give a cash tax credit equal to 10.53% of the qualifying expenditure.

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

  • Staff costs (to include salary costs, employer NIC and employer pension)
  • Subcontractor costs – but only if the subcontractor is individual, partnership or qualifying body.
  • Externally provided workers (restricted to 65 percent)
  • Consumable items (e.g. heat, light and power, and materials ‘consumed’ in the R&D process).
  • Software

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 partner

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

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.

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.

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.

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, an 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.

What are externally provided workers?

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

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 updated. Therefore, in relation to grant funded R&D the legislation still looks at whether the grant is a notified state aid or not. The UK has entered into the Trade and Cooperation Agreement with the EU but the state aid rules have not been replicated in that agreement. Instead, the parties are bound by rules on subsidy control. It is likely that the R&D legislation will be amended in the near future to reflect this. In fact, in March 2021 HMRC launched a consultation with a view to changing the R&D legislation.