Limited companies engaging in research and development (R&D) activities can claim various types of tax relief against their Corporation Tax bill.
Can you claim R&D tax relief?
If your company invests in research and development, such as developing new products, services, or processes, or improving existing ones, you can claim tax relief against your Corporation Tax bill.
The best aspect of R&D tax relief is its availability to any UK company, regardless of size. Success or failure of the R&D project or the company’s profitability doesn’t affect eligibility. The key criteria are undertaking qualifying R&D work and being a limited company registered for Corporation Tax.
How does R&D tax relief function?
Profit-making companies can use a successful R&D claim as a credit against their Corporation Tax bill, thereby reducing their payable amount. In contrast, loss-making organizations can receive cash payments.
Currently, the R&D tax relief system comprises two schemes. However, from April 2024, these will merge into a single scheme. To claim for accounting periods before this date, you can opt for either the SME scheme or the Research and Development Expenditure Credit (RDEC) scheme.
What distinguishes RDEC from SME R&D?
The SME scheme targets smaller businesses needing more financial support for R&D activities. It offers a higher maximum rate of relief than the RDEC scheme, which caters to larger, established companies.
Another key difference lies in their accounting treatment.
The RDEC scheme, an ‘above the line’ scheme, shows any tax credit as income, subject to Corporation Tax. In contrast, the SME scheme operates ‘below the line’.
Which R&D scheme are you eligible for?
Until the schemes merge in April 2024, your company qualifies for SME R&D tax relief if it:
- Employs fewer than 500 people,
- Has a balance sheet of under €86 million, or an annual turnover below €100 million.
If your company exceeds these figures or has received certain notified state aid, you must apply using the RDEC scheme.
How much can you claim for R&D?
As long as the schemes remain separate, the tax relief amount your company can claim on R&D activities hinges on whether it qualifies for the SME scheme or the Research and Development Expenditure Credit (RDEC) scheme.
What can you claim through the SME scheme?
The SME scheme permits companies to use an ‘additional deduction rate’ for tax relief on R&D. This enables you to:
- Deduct 100% of your R&D expenditure (similar to claiming allowable expenses),
- Then deduct an additional percentage of that amount.
For instance, as of 1st April 2023, the additional deduction rate is 86%. A company with qualifying R&D spending can deduct 100% of the amount from its profits and then deduct an extra 86% of that amount, totaling a 186% deduction.
Additional R&D relief for research intensive small businesses
Research intensive small businesses can claim an additional 10% cash credit from 1st April 2023 onwards if they operate at a loss.
What is a ‘research intensive’ business?
A ‘research intensive’ business is an SME where R&D activities make up a significant portion of total spending. To qualify, your R&D spending must be:
- 40% or more of total spending for claims in accounting periods up until 31st March 2024,
- 30% or more for accounting periods starting from 1st April 2024 onwards.
There’s also a grace period that allows companies to receive relief for one year even if their R&D spending falls below the 30% threshold.
Claiming through the RDEC scheme
Claiming through the RDEC scheme involves applying the Research and Development Expenditure Credit (RDEC) as a tax credit against your company’s tax bill. You calculate the credit rate as a percentage of your R&D spending. For instance, if your R&D spending is £100,000 between 1st April 2023 and 31st March 2024, you can claim back 20% of it, which amounts to £20,000.
Remember, RDEC is an above-the-line credit. ‘Above the line’ means you account for the credit in your bookkeeping as income, similar to a grant, and hence you will pay Corporation Tax on it.
What R&D costs can you claim for?
Eligible projects and costs cover a broad range, applicable to nearly every industry. The crucial factor is that your innovation must address some scientific or technical uncertainty and benefit the wider field, not just your company.
Each R&D project is unique, and so are its eligible costs. Commonly included costs are:
- Staff wages, overtime payments, and salaries,
- Employer’s National Insurance Contributions (NIC),
- Costs for subcontractors, freelancers, and externally provided workers (EPWs),
- Payments to volunteers in clinical trials,
- Certain types of software specifically designed for the R&D project (not off-the-shelf software),
- Consumables, including utilities like heat, electricity, and water.
This list is not exhaustive, so seeking advice for R&D tax relief claims is advisable. Innovative companies in creative industries might also be eligible for creative sector tax reliefs.
Can you still claim R&D tax relief if the project fails?
Yes, you can claim tax relief for the research and innovation involved in the developmental process, even if the project ultimately fails.
Cloud, data, and mathematics
From 1st April 2023, you can include specific costs of licensing datasets and cloud computing solutions in your R&D tax relief claim. These costs must directly relate to solving a technical or scientific uncertainty!
If you use the cloud computing service or dataset for work unrelated to the R&D project, you can include a reasonable proportion of the cost in your claim. You can also include data licensing fees, unless you have the permission to publish, share, or sell the data to a third party.
Relief for overseas EPW and subcontractor costs will be removed
After 1st April 2024, you generally won’t be able to claim for R&D work carried out by externally provided workers (EPWs) or subcontractors located abroad.
However, there are exceptions. You may still claim tax relief if the work done by the overseas EPW or subcontractor qualifies as ‘qualifying overseas expenditure’ (QOE). This is applicable, for example, when it’s unreasonable to undertake the R&D work in the UK, such as HMRC’s example of placing sensors on a volcano.
Is there a deadline for claiming R&D tax credit relief?
You must claim tax relief on R&D within two years from the end of the accounting period to which the claim relates.
For instance, you must submit an R&D tax credit claim for an accounting period running from 1st April 2022 to 31st March 2023 by midnight on 31st March 2025.
How do you apply for R&D tax relief?
The application process for R&D tax relief differs for accounting periods starting on or after 1st April 2023.
You may need to submit a Claim Notification form to validate your R&D claim.
The Claim Notification for R&D serves as a pre-notification to HMRC, indicating your intention to claim R&D relief for that accounting period. If this is your first R&D relief claim, or if you haven’t claimed R&D relief in the last three years, you must pre-notify HMRC using a digital service.
You can send the Claim Notification from the first day of the accounting period it relates to, but you must submit it within 6 months from the end of that period. You should include details of any qualifying R&D expenditure in your Company Tax Return.
If you manage multiple companies or collaborate with various partners, ensure that the UTR number and accounting period details on your Claim Notification match those on your CT600 Company Tax Return.
What do you need for an R&D claim?
Start with the Corporate Intangibles Research and Development (CIRD) Manual, as it outlines the general rules and eligibility criteria for R&D tax relief.
Explaining the project
Explain the project in your claim by describing the project and its associated costs clearly to justify your R&D relief claim. Detail why specific challenges in a particular field led to undertaking the work and how the project aimed to overcome these challenges and uncertainties.
Include the contact details of the main person leading the R&D project and details of any professional firms or individuals who assisted in preparing your R&D claim. Detail the number of externally provided workers involved in the R&D project, along with their PAYE scheme reference numbers.
Starting from April 2023, you must provide a complete breakdown of eligible project costs under these headings:
- Cloud computing services and data licenses,
- Contributions to independent R&D,
- The correct SIC code,
- Costs resulting from eligible indirect activities,
- The number of projects included in your claim.
Need more help in claiming your R&D taxes? Reach out to our experts at Count for all the information and guidance you need!