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Research and Development Tax Credits: What you need to know

Research and Development (R&D) tax credits are designed to encourage investment in R&D as well as make the UK an attractive location for innovative businesses. In this article we explore how they could benefit your business.

Over 300,000 claims have been made since the scheme was launched in 2000. The most recent figures published (in September 2020) show that tax relief support of £5.3bn was claimed in 2018/19 resulting from over £35bn of qualifying R&D expenditure.

Since 2003 there have been two schemes in place; the Small or Medium-sized Enterprise (SME) Scheme, and for larger companies the Research and Development Expenditure Credit (RDEC) scheme.

What is R&D?

For tax purposes, guidance states that for R&D activities to qualify for relief, they should meet the following criteria:

  • the project seeks to achieve an advance in science or technology
  • the activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D
  • certain qualifying indirect activities related to the project are also R&D. Activities other than qualifying indirect activities which do not directly contribute to the resolution of the project’s scientific or technological uncertainty are not R&D

HM Revenue & Customs (HMRC) has indicated that the definition should be applied to all branches of science and technology, including software development.

It is important to note that R&D does not need to relate to the creation of an entirely new product; R&D can be related to changes or modifications of an existing product. In fact, R&D does not need to relate to a product at all; R&D expenditure can also be relevant to services and processes.

The R&D should not be seeking to create what is already available (except if it is a trade secret) or could readily be made available by a competent professional working in the relevant field.

Qualifying indirect activities are activities which support the direct R&D activities and include the following:

  • training time for R&D staff if related to the R&D for which the claim is made
  • support staff time spent on R&D activities or supporting R&D staff
  • finance and payroll staff time, to the extent their time relates to the R&D staff

The R&D claim is included in the claimant company’s Corporation Tax return and must be made within two years of the end of the accounting period in which the expenditure was incurred. Companies should ensure that they have sufficient records and documentation available to demonstrate how the work which they have done falls within the definition of R&D.

What is the SME Scheme?

To qualify as an SME, the company must be independent and have:

  • no more than 500 staff, and either:
  • an annual turnover of no more than €100m, or
  • an annual balance sheet figure of no more than €86m

Where a company is a member of a group, the holding company and all companies in the group must together meet this definition.

Note that this definition of SME applies only for R&D relief, so a company may be an SME for R&D relief purposes but a large company for all other purposes.

Any company which is not an SME under the above definition is a ‘large’ company for R&D purposes.

The receipt of grant funding may limit the availability of the SME R&D regime. However, it may still be possible for the company to make a claim under the R&D regime for large companies.

A company cannot claim SME R&D relief where the R&D has been subcontracted to it by another company but it may be possible for the company to make a claim under the large company scheme.

SMEs can claim an additional tax deduction equal to 130% of their qualifying R&D expenditure meaning a total deduction of 230% of the original costs incurred.

If the SME is loss making, then it can opt to surrender all or part of the loss for a payable tax credit which can be helpful for cash flow purposes. There is, however, a cap on the amount of payable tax credit available which was introduced at the Spring Budget 2021. For accounting periods beginning on or after 1 April 2021, the amount of SME payable R&D tax credit that a company can receive in any one year will be capped at £20,000 plus three times the company’s total PAYE and NI liability.

Large company R&D tax relief

Companies which do not qualify for the SME scheme are able to claim a Research and Development Expenditure Credit (RDEC) when working on qualifying R&D projects.

The RDEC is a tax credit, calculated at 13% of relevant expenditure.

A summary of the two schemes relief is set out below:

Loss-making SME (£) Profit making SME (£) Profit making large company (£)
Qualifying R&D expenditure £100,000 £100,000 £100,000
Enhanced deduction at 130% £130,000 £130,000
Total deduction 230% £230,000 £230,000
Payable tax credit at 14.5% / RDEC at 13% £33,350                  £13,000
Tax deduction / charge at 19%  £43,700           £2,470
Net RDEC credit £10,530       
Effective tax saving on £100,000 qualifying R&D expenditure 33.35% 43.70% 10.53%

What should I do?

Claims under both schemes can be made up to two years from the end of the accounting period in which the relevant expenditure was incurred and therefore it may be worth considering whether any of your company’s activities in that period might have been qualifying activities for R&D relief.

As well as expenses incurred to date you may also wish to review your company’s future plans from an R&D perspective to identify relevant projects. You can then consider ways you might be able to utilise your existing financial and non-financial reporting processes, or introduce new ones, to ensure that as much relevant expenditure and R&D activity is separately identified as possible. If you can do this on an ongoing basis the claims process is likely to be more straightforward.

How can we help?

Our team can help you to:

  • identify qualifying R&D projects
  • assess the amount of the claims and ensure they are optimised
  • prepare supporting reports for HMRC
  • complete and submit your corporation tax returns, including the R&D claims.

Would you like to know more?

If you would like to discuss how R&D tax credits could benefit your business, please get in touch with your usual Blick Rothenberg contact or one of the Partners whose details you can find on this page.

You can also visit our Technology & Digital Media Hub for other related articles.