Research and Development (R&D) relief was introduced to encourage companies to invest in projects which advance technology and science. It can be claimed by a range of companies that seek to research or develop an advance in their field and can even be claimed on unsuccessful projects.
The R&D Schemes
The relief is available to UK registered companies. There are two separate schemes, one for Small and Medium sized enterprises (SME) and the other for large companies.
The SME Scheme
A SME is defined as having:
- less than 500 employees
- an annual turnover of less than €100 Million and
- a Balance Sheet total of less than €86 Million.
Where a company is part of a larger enterprise (such as a group of companies) these limits apply to the enterprise as a whole. For this purpose, a ‘larger enterprise’ includes parent companies, subsidiaries and ‘partner enterprises’ – any company which holds a 25% shareholding in the applying company and any company in which the applying company holds a 25% share.
The Large Company Scheme – Research and Development Expenditure Credit (RDEC)
This replaced the relief previously available under the large company scheme. The RDEC can also be claimed by large companies and SMES who have been subcontracted to do R&D work by a large company.
Qualifying Projects
R&D can only be claimed on “qualifying projects” which are defined as “those projects that seek to achieve an advance in overall knowledge or capability in science or technology through the resolution of scientific or technological uncertainty”.
The project must be related either to the company’s existing trade, or to a trade that it intends to start up, based on the results of the R&D project. R&D takes place even if the advances sought by the project are not achieved or fully realised.
Advances include new or improved products, processes and services.
Spending related to cloud computing and data can be included in R&D tax relief claims from 1 April 2023 – a change that will be particularly beneficial for businesses working in the tech and media sectors.
For the latest list of projects which count for R&D see this page on Claiming Research & Development tax reliefs at gov.uk
Qualifying Costs
Provided the project meets the necessary requirements to qualify as an R&D project, the company may claim costs incurred on the project in respect of employee costs, materials, utilities (power, water and fuel), computer software and 65% of subcontracted costs. Capital expenditure is excluded.
From 1 April 2024, Research & Development tax reliefs will be restricted to activities undertaken in the UK with only a very limited scope for claiming any overseas activities. UK companies that currently claim R&D costs paid to, for example, overseas group companies or overseas third parties may no longer be able to include these costs in their claims.
From 1 April 2023, payments to externally provided workers to carry out R&D only qualify for relief to the extent that those workers’ earnings are taxed through the pay as you earn (PAYE) system.
Spending related to cloud computing and data can be included in R&D tax relief claims from 1 April 2023 – a change that will be particularly beneficial for businesses working in the tech and media sectors. For example, businesses that pay licence fees to rent cloud computer space or pay for data in the context of R&D will be able to incorporate these costs into their claims.
Subsidies and Grants
Subsidies and grants received in respect of the qualifying project reduce the amount that can be claimed as R&D.
Any “State Aid” grant or subsidy received disqualifies the project from R&D under the SME scheme, but in certain circumstances it may still be possible to make a claim under the Large Company Scheme for that project. Other subsidies and grants will reduce the amount eligible for the uplift.
The Reliefs Available
SME R&D relief
The SME scheme allows companies to:
1. Deduct costs
SMEs can deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction. Since 1 April 2021 the amount of R&D tax credit that a business can receive was capped at £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NIC) liability for the period.s
However, a business is exempt from the cap if:
- its employees are creating, preparing to create or managing intellectual property
- it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers by, connected persons.
This does not affect the 130% relief on qualifying annual R&D costs, just the amount which you can surrender for cash. So, if the cash refund is restricted, you can still carry forward the rest to claim as part of the trading loss in future years.
Note that from 31 March 2023 the small and medium-sized enterprises (SME) additional deduction decreased from 130% to 86%.
2. Claim a tax credit if the company is loss-making
This is currently worth up to 14.5% of the surrenderable loss but will reduce to 10% from 31 March 2023.
From 1 April 2023, a new credit rate will be available to loss-making companies whose R&D expenditure constitutes at least 40% of their total expenditure. From 1 April 2023, qualifying companies can claim a payable credit rate of 14.5% for qualifying R&D expenditure instead of the 10% rate under the existing R&D small and medium-sized enterprise (SME) scheme.
Research and Development Expenditure Credit
The Research and Development Expenditure Credit has allowed 13% of your qualifying R&D expenditure as a tax credit since 1 April 2020. After 31 March 2023 the expenditure credit rate increased to 20%.
Record Keeping
There are currently no specific requirements for record-keeping, except that sufficient records must be maintained to support the entries on the Company Tax return.
From 1 April 2023, businesses must inform HMRC online that they will be making an R&D claim within six months of the end of the accounting period to which the claim relates. Failure to notify could lead to disallowance of the R&D claims. However, businesses that have claimed R&D in one of the preceding three periods will not need to pre-notify
HM Revenue & Customs open enquiries into many R&D claims and their record-keeping standards are quite strict. For example, they can demand timesheets and other records for those employees engaged in R&D, as well as descriptions of projects undertaken, aims and outcomes.
CAN WE HELP?
If you would like to know more about how we can help with applications and compliance regarding Research & Development tax reliefs, please speak with your Shipleys contact or one of our specialists shown on this page.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
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