UK research and development tax credits

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R&D is a valuable relief the UK government offers to incentivise businesses to innovate and enhance productivity.

R&D is a valuable relief the UK government offers to incentivise businesses to innovate and enhance productivity.R&D is a valuable relief the UK government offers to incentivise businesses to innovate and enhance productivity.
Contents

Overview

R&D is a valuable relief the UK government offers to incentivise businesses to innovate and enhance productivity. However, the scheme is widely underutilised, and over several budgets, the Chancellor of the Exchequer has sought to widen the scope for claiming this relief. 

The Chancellor will implement the most recent changes he made from April 2023.

R&D tax credits are tax relief designed to encourage greater R&D spending and investment in innovation. They work by reducing your company's liability to corporation tax or giving you a cash payment.

There are two schemes for claiming relief:

  1. Small or Medium-sized Enterprise (SME)
  2. Research and Development Expenditure Credits (RDEC)

R&D will qualify under either scheme if you attempt to overcome scientific or technological uncertainties at your own risk.

With the SME scheme, up to 33% of the qualifying R&D costs can be set against corporation tax. In addition, you can backdate claims up to two years from the end of your accounting period.

The criteria to claim – what do companies need to prove?

The scheme itself requires there to be an advance in science or technology. However, the definition is slightly broader than it sounds insofar that if an advance is sought but ultimately not achieved because, say, the project failed, relief may still be available. So it's essential to be aware of the unsuccessful and successful projects; this can often mean that where there has been some element of trial-and-error, or failed projects, then R&D could have taken place – and you can still make a valid claim. 

A business must have attempted a project at its own risk by creating new or enhancing existing products, services, software or processes. The R&D has to be contained in a specific project and include, for example, identifiable materials and staff costs. It's also vital that, at the outset of the project, a competent professional in that field would not know how to achieve the advance sought.

Finally, for a business to qualify, it must be an SME (HMRC definition, so it must be a limited liability and subject to corporation tax). In addition, there must be fewer than 500 employees, with either a turnover under €100 million or a balance sheet net asset value lower than €86 million. 

Costs which can qualify

How relief is given 

Once a claim has been prepared for profit-making companies, the benefit calculation is straightforward. The claim gives an additional 130% deduction regarding the R&D qualifying expenditure. For a £100,000 spend, therefore, the company achieves an additional £130,000 in its corporation tax return and saves tax at the corporation tax rate, currently 19% (i.e. potentially £24,700 or £32,500 from April 2023).

Where the company is loss-making, the situation is slightly different, and the company is afforded more choice. The scheme for SMEs allows the company to surrender its R&D-related loss for a 14.5% tax credit from HMRC  (i.e. HMRC will pay 14.5% of the surrendered loss). The relevant R&D loss includes 230% of the expenditure (i.e. the 100% that would already be posted to the profit and loss account and the additional 130% enhanced deduction for tax purposes). Therefore, a loss-making company with the same £100,000 expenditure on R&D could be eligible for £33,500 cash paid from HMRC.

It's a fact that many companies miss out on claiming this relief because they simply do not know about it, or they've heard about it and incorrectly assume it does not apply to them. It can be complex to navigate, and it's crucial to be fully aware of qualifying costs – and what cannot be claimed.

If you feel you have carried out anything innovative or worked on any project you consider could be classified as "research & development", please get in touch with us, and we'll advise on how to proceed to the next stage.

This article was provided by EasyRnD

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Overview

R&D is a valuable relief the UK government offers to incentivise businesses to innovate and enhance productivity. However, the scheme is widely underutilised, and over several budgets, the Chancellor of the Exchequer has sought to widen the scope for claiming this relief. 

The Chancellor will implement the most recent changes he made from April 2023.

R&D tax credits are tax relief designed to encourage greater R&D spending and investment in innovation. They work by reducing your company's liability to corporation tax or giving you a cash payment.

There are two schemes for claiming relief:

  1. Small or Medium-sized Enterprise (SME)
  2. Research and Development Expenditure Credits (RDEC)

R&D will qualify under either scheme if you attempt to overcome scientific or technological uncertainties at your own risk.

With the SME scheme, up to 33% of the qualifying R&D costs can be set against corporation tax. In addition, you can backdate claims up to two years from the end of your accounting period.

The criteria to claim – what do companies need to prove?

The scheme itself requires there to be an advance in science or technology. However, the definition is slightly broader than it sounds insofar that if an advance is sought but ultimately not achieved because, say, the project failed, relief may still be available. So it's essential to be aware of the unsuccessful and successful projects; this can often mean that where there has been some element of trial-and-error, or failed projects, then R&D could have taken place – and you can still make a valid claim. 

A business must have attempted a project at its own risk by creating new or enhancing existing products, services, software or processes. The R&D has to be contained in a specific project and include, for example, identifiable materials and staff costs. It's also vital that, at the outset of the project, a competent professional in that field would not know how to achieve the advance sought.

Finally, for a business to qualify, it must be an SME (HMRC definition, so it must be a limited liability and subject to corporation tax). In addition, there must be fewer than 500 employees, with either a turnover under €100 million or a balance sheet net asset value lower than €86 million. 

Costs which can qualify

  • Staff
  • Externally provided workers
  • Subcontractors
  • Materials and consumables (including utilities)
  • Payments to the subjects of clinical trials
  • From April 2023 – Data and cloud computing costs

How relief is given 

Once a claim has been prepared for profit-making companies, the benefit calculation is straightforward. The claim gives an additional 130% deduction regarding the R&D qualifying expenditure. For a £100,000 spend, therefore, the company achieves an additional £130,000 in its corporation tax return and saves tax at the corporation tax rate, currently 19% (i.e. potentially £24,700 or £32,500 from April 2023).

Where the company is loss-making, the situation is slightly different, and the company is afforded more choice. The scheme for SMEs allows the company to surrender its R&D-related loss for a 14.5% tax credit from HMRC  (i.e. HMRC will pay 14.5% of the surrendered loss). The relevant R&D loss includes 230% of the expenditure (i.e. the 100% that would already be posted to the profit and loss account and the additional 130% enhanced deduction for tax purposes). Therefore, a loss-making company with the same £100,000 expenditure on R&D could be eligible for £33,500 cash paid from HMRC.

It's a fact that many companies miss out on claiming this relief because they simply do not know about it, or they've heard about it and incorrectly assume it does not apply to them. It can be complex to navigate, and it's crucial to be fully aware of qualifying costs – and what cannot be claimed.

If you feel you have carried out anything innovative or worked on any project you consider could be classified as "research & development", please get in touch with us, and we'll advise on how to proceed to the next stage.

This article was provided by EasyRnD

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