Guide for Research and Development Tax Relief
In today's competitive business landscape, innovation is the key to staying ahead of the curve. However, investing in research and development (R&D) can be a costly endeavour. Fortunately, the UK government recognises the importance of innovation and offers a valuable incentive through the R&D Tax Credit scheme. This initiative allows businesses to claim a tax deduction or cash payment for their qualifying R&D expenditures, providing a significant financial boost to companies of all sizes.
In this blog post, we'll dive deep into the world of R&D Tax Credits, exploring what they are, who is eligible, and how businesses can successfully claim them. We'll also discuss the benefits of claiming R&D Tax Credits and how working with experienced professionals, such as dns accountants, can help maximise your claim.
Understanding R&D Tax Credits
Research and Development (R&D) Tax Credits are a UK government incentive designed to encourage businesses to invest in innovation. The scheme allows companies to claim a tax deduction or cash payment for qualifying R&D expenditures incurred while developing new products, processes, or services, or enhancing existing ones.
There are two main types of R&D Tax Credits:
The SME R&D Tax Credit scheme, which is aimed at small and medium-sized enterprises (SMEs).
The Research and Development Expenditure Credit (RDEC) scheme is designed for large companies.
How Does R&D Tax Relief Work?
A successful R&D claim for profit-making companies will be applied as a credit against your bill for Corporation Tax, reducing the amount you need to pay. Loss-making organisations can receive cash payments instead. The R&D tax relief system now operates as a single merged scheme, but to claim R&D tax relief for accounting periods before April 2024, you'll need to apply to the correct scheme depending on your eligibility.
Which R&D Scheme Do I Qualify For?
For periods before April 2024, you will qualify for SME R&D tax relief if your company:
Employs fewer than 500 people
Has a balance sheet of under €86 million, or an annual turnover below €100 million
Tax Tip: If your company has received a grant or subsidy for an R&D project, it may affect your eligibility for the SME scheme. In such cases, you need to claim under the RDEC scheme however in a few cases, the SME scheme may be eligible too.
Eligibility Criteria
To be eligible for R&D Tax Credits, your business must meet the following criteria:
Be registered in the UK and liable for corporation tax.
Carry out qualifying R&D activities aimed at advancing knowledge or capabilities in science and technology.
Vehicles
Incur eligible expenditures on these R&D activities.
Qualifying R&D Activities
Qualifying R&D activities can encompass a wide range of projects across various industries. These activities should aim to achieve an advance in science or technology through the resolution of scientific or technological uncertainties. Examples of qualifying R&D activities include:
Developing new products, processes, or services.
Improving existing products, processes, or services.
Creating new or improved software solutions.
Conducting scientific or technological research.
Overcoming technical challenges or uncertainties.
It's important to note that qualifying R&D activities can occur in any sector, from manufacturing and engineering to software development and biotechnology.
Tips: Even if the project ultimately fails, you can still claim tax relief on behalf of the research and innovation that went into the developmental process.
What you can claim through the SME scheme
The SME scheme allows companies to claim tax relief on R&D using an 'additional deduction rate'. This means you can:
Deduct 100% of the amount which you spend on R&D (like you would when claiming allowable expenses)
And then deduct a percentage of that amount again
For example, the additional deduction rate from 1st April 2023 is 86%. A company with spending which qualifies for R&D relief can deduct 100% of the amount from its profits, and then deduct a further 86% of the amount, to make a total 186% deduction.
R&D Expenditure Occurred Additional Deduction Rate Before 1st April 2023 130% 1st April 2023 onwards 86% Additional R&D Relief for Research Intensive Small Businesses
Small companies may be able to claim an additional 10% cash credit if they make a loss, but are considered to be 'research intensive'.
What is a 'Research Intensive' Business?
Your company may be considered 'research intensive' if it's an SME, and the amount it spends on R&D activities accounts for a sizable chunk of its total spending. To qualify, the percentage of your expenditure which relates to R&D must be:
40% or more for claims in accounting periods up until 31st March 2024
30% or more for accounting periods that start 1st April 2024 onwards
There will also be a grace period allowing companies to continue receiving relief for one year if their R&D spending dips below the 30% threshold.
Claiming through the RDEC scheme
Research and Development Expenditure Credit (RDEC) is a tax credit applied against the company's tax bill. The expenditure credit rate is worked out as a percentage of what you spend on R&D.
R&D Expenditure Period Percentage of R&D Spending as Tax Credit 1st April 2020 – 31st March 2023 13% 1st April 2023 onwards 20% For example, if you spend £100,000 on R&D between 1st April 2023 and 31st March 2024, you can claim 20% of it back – which is £20,000.
Just remember; RDEC is an above-the-line credit. 'Above the line' means the credit is accounted for in your bookkeeping as if it were income – a bit like a grant – so you'll pay Corporation Tax on it.
Eligible Expenditures
To claim R&D Tax Credits, your business must have incurred eligible expenditures on qualifying R&D activities. These expenditures can include:
Staff costs, including salaries, wages, and associated costs like pension contributions and employers' NICs.
Subcontractor and freelancer costs for work related to the R&D project.
Materials and consumables used in the R&D process.
Utilities, such as water, fuel, and power, used directly in the R&D project.
Software licences and other IT costs directly related to the R&D activities. Cloud, data, and mathematics can also be included in a claim for R&D tax relief for periods from 1st April 2023. These costs still have to relate directly to solving a technical or scientific uncertainty!
Tax tips: if you sue associated companies/connected companies you may still qualify for that cost under subcontractor.
Claiming R&D Tax Credits
The process of claiming R&D Tax Credits involves several steps:
Identifying qualifying R&D activities and eligible expenditures.
Preparing a comprehensive technical report that describes the R&D project, its objectives, the scientific or technological uncertainties encountered, and how they were addressed.
Calculating the total eligible R&D expenditure and the potential tax credit or cash payment.
Submitting the claim to HMRC, along with the necessary supporting documentation.
SMEs can claim their qualifying R&D expenditure, either as a tax deduction or a cash payment if the company is loss-making. Large companies can claim a Research and Development Expenditure Credit (RDEC) worth 20% of their qualifying R&D expenditure.
Note : From 8 August 2023, claimants are now required to submit an additional information form in order to submit their R&D claim. This will include a detailed account of your qualifying expenditure, the number of projects worked on, a baseline of science or technology that you planned to advance, the advance in scientific or technical knowledge, the scientific or technological uncertainties faced, and details on how your project sought to overcome these uncertainties.
The Future of R&D tax credits
As the UK government continues to recognise the importance of innovation in driving economic growth, the R&D Tax Credit scheme will likely remain a key incentive for businesses in the years to come. In the Budget, the Chancellor announced plans to simplify and enhance the R&D Tax Credit scheme, with a focus on supporting cutting-edge research and development in the UK. These plans include:
The current SME and RDEC R&D schemes have merged (with effect from 1 April 2024) into one above-the-line credit scheme which broadly follows the current RDEC scheme, with a headline rate of relief of 20%.
The current SME and RDEC R&D schemes have merged (with effect from 1 April 2024) into one above-the-line credit scheme which broadly follows the current RDEC scheme, with a headline rate of relief of 20%.
The 20% credit is taxable, meaning a net benefit of 15% of qualifying expenditure for claimants paying the 25% main rate of corporation tax. For those paying tax at the 19% small companies' rate or in a tax loss position, the net benefit is 16.2%.
The merged scheme will take effect for accounting periods beginning on or after 1 April 2024 and run alongside the SME R&D intensive scheme.
Company Merged scheme SME intensive scheme Loss making SME 16.20% n/a Profit making SME Up to 16.2% n/a R&D intensive' SME n/a Up to 27% Large company Up to 16.2% n/a Other changes:
The subcontracted expenditure rules are significantly changed. Broadly, relief is available to the company that takes the decision to initiate the R&D and bears the risk of failure.
The existing subsidised expenditure rules for SMEs are removed entirely.
New overseas expenditure restrictions mean that companies subcontracting R&D activity to third parties can generally only claim relief if that activity is performed in the UK.
Similarly, companies utilising externally provided workers can usually only claim relief where they are paid through a UK payroll. Exceptions exist for situations where it is 'wholly unreasonable' or impossible to undertake the required activities in the UK.
A PAYE/National Insurance contributions cap on claims is retained, adopting the more generous rules from the existing SME regime.
For claims submitted after 31 March 2024, claimant companies can no longer nominate third parties to receive payable R&D tax credits.
These changes demonstrate the government's ongoing commitment to supporting innovation and ensuring that the R&D Tax Credit scheme remains effective and accessible to businesses of all sizes.
Maximising Your R&D Tax Credit Claim
To maximise your R&D Tax Credit claim, it's essential to work with experienced professionals who understand the complexities of the scheme and can guide you through the claiming process.
dns accountants, a leading provider of R&D tax services in the UK, can help you identify all qualifying R&D activities and eligible expenditures, ensuring that your claim is comprehensive and optimised. Their team of experts can assist you in preparing a robust technical report and submitting your claim to HMRC, maximising your chances of success.
Working with dns accountants can also help you:
Stay up to date with the latest changes in R&D Tax Credit legislation.
Avoid common mistakes and pitfalls in the claiming process.
What it's based on: Inheritance tax is based on the total value of the estate at the time of death. Capital gains tax is based on the increase in value of a specific asset from the time of inheritance to the time of sale.
Minimise the risk of an HMRC enquiry by ensuring your claim is accurate and well-supported
Access expert advice and support throughout the claiming process and beyond.
Real-Life Success Stories
Many UK businesses have successfully claimed R&D Tax Credits and reaped the benefits of this powerful incentive. Here are a few examples:
A software development company claimed over £100,000 in R&D Tax Credits for their work on developing a new artificial intelligence-based solution for the healthcare industry.
A manufacturing firm received a cash payment of £50,000 for their R&D efforts in creating a more sustainable and eco-friendly production process.
A biotechnology startup secured £75,000 in R&D Tax Credits, which they used to fund further research into innovative treatments.
These success stories demonstrate the tangible impact that R&D Tax Credits can have on businesses of all sizes and sectors.
R&D Tax Credits are a valuable incentive for UK businesses to invest in innovation and drive growth. By understanding the eligibility criteria, identifying qualifying R&D activities and expenditures, and working with experienced professionals like dns accountants, companies can successfully claim R&D Tax Credits and unlock the financial benefits of this powerful scheme.
As the business landscape continues to evolve, investing in R&D will become increasingly crucial for companies looking to stay competitive and thrive in the long term. By leveraging the support provided by R&D Tax Credits, businesses can create a culture of innovation, driving advancements in their industries and contributing to the overall growth of the UK economy.
If you're interested in learning how R&D Tax Credits can benefit your business, dns accountants is here to help. Our expert team specializes in maximizing R&D Tax Credit claims, guiding you through the process to fuel your company's innovation and success. We understand the complexities of R&D tax relief and can help you navigate the claiming process with ease.
At dns tax, we're committed to providing tailored solutions for your specific needs. Our friendly experts are ready to discuss your requirements and answer any questions you may have.
Contact us today at 0333 2422 572, email dnstax@dnsaccountants.co.uk, or book a free consultation. Let's work together to unlock your business's potential through R&D Tax Credits.
About the author
Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.