It’s unlikely you’ll jump for joy when you think about... Read more
An Introduction to R&D Tax Relief
23 October 2023
R&D tax relief is a forward-looking tax relief that provides cash resources for businesses. Discover why it’s firmly on the agenda of so many UK companies.
A GUIDE TO R&D TAX RELIEF
Since 2000, the Government has supported businesses that invest in innovation through Research & Development (R&D) tax relief. This forward-looking tax incentive encourages investment in activities today, that will hopefully bring improvements in the future. R&D tax relief can have a transformative impact on the growth of your business, bringing financial support for turning ideas into concepts and ultimately, commercial success.
This introduction to R&D tax relief will explain its purpose, how it can support your work, eligibility criteria, and more.
WHAT IS R&D TAX RELIEF?
The Government introduced the R&D tax relief scheme in 2000. Their objective is to boost the UK’s competitive advantage gained from the application of new or improved knowledge and capabilities in fields of science and technology that underpin commercial pursuits.
The focus of R&D tax relief is to fund the science or technology based project work seeking growth in scientific and/or technological know-how and capability, rather than a project’s overarching commercial intent. It’s important to note that you could have a project that qualifies for tax relief, even if your efforts fail. Success is not a requirement.
HOW r&D TAX RELIEF SUPPORTS YOUR WORK
If your business is trading and profitable, R&D tax relief would enable cash resources to become available through corporation tax savings.
If your business is not yet profitable, or if R&D tax relief generates a loss for tax purposes, even though your accounts show a profit, you can choose to receive a payable cash credit in exchange for the tax loss. This is known as R&D tax credits.
You can use the cash you receive as a payable credit, or retain in your business by paying less corporation tax to reinvest in further development projects:
- more staff
- new equipment
- larger premises
- funding development materials
R&D tax relief helps to accelerate the path to growth and scales with the growth of your business. Let’s take a closer look at the benefits of this funding.
There are several benefits to R&D tax relief.
- Repeatable – R&D tax relief can be claimed for each accounting period that your company meets the qualification criteria. Hence, it’s a source of funding that could be available annually.
- Non-competitive – if your business meets the requirements for tax relief, you’ll receive the funding. There’s no competition like there would be if you applied for a grant.
- Timely – tax relief is claimed via your company tax return, in line with your business’s annual accounting period.
- Unrestrictive – R&D tax relief isn’t a loan. So, there’s no future cash commitment or interest. Also, you don’t have to give up control in your business to receive cash funding for investment.
- Annual focus – knowing the claim must be made once a year, and the period it covers in advance, gives you time to prepare as you do the work. And preparing a claim isn’t as time-consuming as the administration around applying for, monitoring and reporting for a grant.
- Boosts earnings before interest, taxes, depreciation and amortisation (EBITDA) – currently there are two schemes for relief. The R&D Expenditure Credit Scheme (RDEC) and the Small or Medium Enterprises (SME Scheme). The former boosts EBITDA, because the credit is recognised as additional income in the Statutory Accounts before giving the tax relief. The latter doesn’t boost EBITDA – however, the Government are contemplating merging both schemes into a single scheme that would operate the same way as RDEC, across the board.
TAX RELIEF VALUE
|SME SCHEME||RDEC SCHEME|
|Dates for rate change||Up to 31 March 2023||From 01 April 2023||Up to 31 March 2023||From 01 April 2023|
|Loss-making company||Up to 33.3p||Up to 18.6p||11p||15p|
|Loss-making R&D intensive company||N/A||Up to 27p||N/A||N/A|
WHO IS ELIGIBLE FOR R&D TAX RELIEF?
If you can demonstrate your business is undertaking project work to create new or improved knowledge and capabilities in a field (or subfield/branch) of science or technology, you might be eligible. Let’s consider the basics of eligibility criteria.
Your project has to be undertaken within a UK incorporated company that has a trade or has an intention to trade. The development work you are undertaking must have the intention of facilitating growth or extension of your trade, and be relevant to the trading activities of your company.
Your business will be either creating or making changes to:
Your company will be focused on creating something that doesn’t yet exist, or improving what does exist, or duplicating something that exists, but in a fundamentally different way.
Your business must have incurred costs to fund the activities that contributed to the problem-solving work as part of the development project.
Your company will be undertaking a project exploring the application of scientific or technological principles relevant to your field or industry.
Your business is searching for solutions to problems that current science or technology can’t yet resolve.
QUALIFYING EXPENDITURE CATEGORIES FOR R&D TAX RELIEF
Ultimately, how much each of the below can be linked to the ‘problem solving work’ referred to above is what generates the value of the R&D tax relief for your business.
- Staffing costs
- Software (including cloud computing and data licences from 1 April 2023)
- Agency workers (referred to as Externally Provided Workers)
- Subcontracted activities (SME scheme only)
THE THREE PILLARS OF ELIGIBILITY
There are three fundamental principles when considering R&D tax relief.
You need to establish the existence and scope of your ‘projects’. If you don’t have a ‘project’ the work won’t qualify. The definition of a project is based on the definition in the Oxford Dictionary:
‘a planned piece of work that is designed to find information about something, to produce something new, or to improve something.’
SCIENTIFIC OR TECHNOLOGICAL UNCERTAINTY
Establishing projects where scientific or technological uncertainty is present. The work can’t qualify if there isn’t scientific or technological uncertainty. It’s not enough to simply seek an advance in science or technology – if it’s relatively easy to do (or work out) within baseline knowledge and capabilities, the project won’t qualify.
Establishing projects seeking to move knowledge and capabilities beyond the baseline already achieved in a field of science or technology. The scientific or technological inputs and outputs count, but the commercial points of difference do not. Commercial points of difference are what set in motion a project that may then require a separate project (or number of projects) to develop science or technology to achieve them. Care is therefore needed to distinguish between the two when identifying development projects for this tax relief. A key hallmark of the goal to advance science or technology being present is you’ll likely have identified gaps in know-how for the underlying science or technology that are standing in the way of you achieving your commercial goal.
HOW DO I PREPARE AN R&D TAX RELIEF CLAIM?
You should prepare your R&D tax relief claim by following this four-step process.
- Identify qualifying projects – these are projects that meet the requirements of the Business, Energy & Industry Strategy (BEIS) guidelines on the meaning of R&D for tax relief purposes. You should draft narratives to explain how your work aligns with these in a format a layperson (e.g., an HMRC caseworker) can understand.
- Identify qualifying expenditure – identify where you’ve spent money against the permissible categories for R&D tax relief, and how you can establish a link between expenditure and the specific project activities that are eligible for relief. Analyse these costs and document any methodologies applied to calculate them.
- Compile supporting evidence – keep contemporaneous project notes that informed the direction of your development work. Make notes on your research to establish that there was a gap in scientific/technological knowledge and/or capability. Collate invoices for the costs you want to claim. These would not be submitted with the claim but may be requested by HMRC at a later date, so it’s a good idea to get them together and save them with your R&D report.
- HMRC submissions – check whether you need to prepare and submit HMRC’s Claim Notification Form (CNF) and prepare and submit HMRC’s Additional Information Form (AIF). Have your accountant add your claim figures to the corporation tax computation/tax return and submit this together with a full supporting R&D claim report. Make sure you’ve done the AIF first, otherwise HMRC will reject your claim once the company tax return is submitted.
You have two years from the accounting period end to file your claim. However, if you do need to file the CNF, this must be done within 6 months of the end of your accounting period. Otherwise you will lose the ability to make a claim altogether. The rules around when a CNF is required are set out here.
WHEN TO CONSIDER R&D TAX RELIEF
Regardless of where you are in your journey from concept to commercialisation, the sooner you get a handle on the guidelines for R&D and how to assess your work against them, the better.
If you still need help, don’t hesitate to contact our expert team today with an email, or call 0330 173 4781.