What are Research and Development tax reliefs?
R&D tax relief is a government incentive providing companies with tax breaks to encourage investment in innovative projects in the field of science and technology.
The New Merged Scheme
The R&D scheme has been subject to a significant level of reform in order to help tackle abuse and improve compliance.
For accounting periods starting on or after 1 April 2024, most companies now need to claim R&D under the ‘simplified’ merged scheme, replacing the SME and RDEC schemes, which provide differing rates of relief.
The merged scheme is similar to the RDEC scheme in that an above the line credit will be provided at 20% of qualifying expenditure. As this is taxable, the net benefit for a company subject to the main rate of corporation tax will be 15%.
The notional tax rate applied to loss making companies is the small profit rate of 19%, rather than the 25% main rate.
Subcontracted R&D – Which party can claim R&D?
The merged scheme determines which party can claim R&D, moving away from companies undertaking R&D activities to those planning, initiating, funding and bearing the risk of failure of the R&D.
This may create challenges to determine which party is entitled to claim, and therefore, discussions should be made prior to the commencement of projects so there is a clear consensus and contracts can be drafted accordingly. Companies should also keep detailed records to demonstrate they are entitled to claim.
Subsidised Expenditure
The subsided expenditure restrictions in the SME scheme is not applied to the merged scheme. This means where companies receive grant funding, no restrictions will be applied to reduce or prevent a claim being made.
PAYE/NICS
The merged scheme provides more generous caps than the SME scheme.
Overseas Expenditure
Overseas expenditure is generally excluded unless certain conditions are met, such as where it is wholly unreasonable or impossible to undertake R&D activities in the UK. Companies should review their current claims to identify the overseas expenditure, for example, by tracking the location of costs.
R&D Intensive Regime
An Intensive Scheme is available for companies which spend 30% or more of their overall expenditure on R&D. This scheme is broadly operated under the SME model and provides relief at 186% of eligible expenditure. Loss making companies can claim a tax credit at a rate of 14.5%.
Enhanced R&D Intensive Support Scheme
An Enhanced R&D Intensive Support Scheme “ERIS” is available for companies which spend 30% or more of their overall expenditure on R&D. This scheme is broadly operated under the previous SME model and provides relief at 186% of eligible expenditure. Loss making companies can claim a tax credit at a rate of 14.5%.
Eligibility
The eligibility criteria to claim R&D has not changed. For a project to qualify as R&D, you should set out to achieve an advance in science or technology, not just in your company’s own knowledge.
Your project can still qualify for R&D if the advance has already been achieved, but the details are not readily available, for example, if they are a trade secret.
UK registered companies that incur expenditure on developing new products, processes or services or enhancing existing ones, may be eligible to claim R&D.
The scope for identifying R&D is huge – in fact, it exists in every single sector. It occurs in everything from cheese-making to chemical engineering, and construction to digital development.
If your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’, then you may be carrying out a qualifying activity.
If your project is possible, or you do not know how to achieve it in practice, you could be resolving technological uncertainties and carrying out qualifying R&D. Even expenditure on unsuccessful projects can qualify if they meet the criteria.
R&D Administration
Additional requirement for all claims
Additional information, including details of expenditure and projects must be submitted to HMRC digitally to support all claims. The additional information must be completed prior to the submission of the Corporation Tax return, otherwise it will be removed by HMRC as an invalid claim.
Advance Notification
For accounting periods starting on or after 1 April 2023, an Advance Notification Form is required to be completed. This will typically apply to companies seeking to claim R&D for the first time or for new companies wishing to claim. The notification must be made within 6 months from the end of the accounting period the claim relates to. HMRC will remove any claims which have not been pre-notified.
Companies that have submitted an R&D claim in the previous three accounting periods do not need to submit an Advance Notification Form.
Get in touch
Companies need to ensure they submit relevant forms with supporting information to HMRC to prevent claims from being rejected.
Existing and new companies will need to assess whether they have undertaken R&D activities within a fairly short timeframe so that a prior notification can be made to HMRC.
We can assist companies to ensure valuable R&D tax reliefs are secured. If you would like more information or any advice on this article then please contact us by emailing solutions@ellacotts.co.uk or call us on 01295 250401. You can also contact us here with your query and we will get back to you.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
