A guide to R&D Tax Relief Eligibility Criteria

12 December 2023

You may have heard of R&D tax relief, but you might not be sure of the eligibility criteria. In this guide, you’ll learn how to correctly interpret your work, and avoid a missed opportunity to access funds that can support your business growth.

WHAT IS RESEARCH AND DEVELOPMENT TAX RELIEF?

Research and development (R&D) tax relief/tax credits, is a long-established way to access cash resources provided by the Government. This tax relief is designed to subsidise the costs incurred by UK companies seeking competitive advantage through innovation in their:

  • products
  • goods
  • services.

This relief also covers development work in relation to systems and processes integral to a product, service, or other business-related systems, reliant on moving forward capabilities in science or technology that benefit a company’s trade.

HOW IS CASH MADE AVAILABLE THROUGH R&D TAX RELIEF?

Cash resources are made available through a reduction in a company’s corporation tax bill (R&D Tax Relief) or through a payment of a cash credit (R&D Tax Credits).

The form of the relief depends on whether a company made taxable profits or a tax loss during the year the qualifying project work was carried out.

It’s possible both forms of cash generation will be in point for the same claim period in certain circumstances. We can help you understand this.

what do i need to do to make an r&d tax relief claim?

There are two elements to an R&D claim:

  • Qualifying the claim – demonstrating eligibility criteria have been met.
  • Quantifying the claim – linking allowable expenditure to eligible work.

If your company is eligible for this relief, it is the allowable expenditure that ultimately determines the value of the cash/tax benefit received.

The chart below gives a snapshot of the potential value returned for every £1 of qualifying expenditure identified, depending on the scheme and the tax profile of a company:

Rates of relief correct up to 31 March 2024

INTRODUCTION TO ELIGIBILITY CRITERIA 

Unsurprisingly, qualifying for this Innovation Incentive requires numerous conditions to be met – it is a tax item after all!

Eligibility criteria covers multiple factors, and need to be met by a claimant company:

  • How your work benefits your trade.
  • How you came to start the project.
  • The boundaries around the type of activities that count.
  • The tax nature of costs incurred.
  • Time limits for claiming.

WHO NEEDS TO UNDERSTAND RESEARCH AND DEVELOPMENT ELIGIBILITY CRITERIA?

Everyone involved in assisting with the claim compilation must understand the eligibility criteria, including:

  • business owners
  • your finance staff
  • your science and technology staff (aka competent professionals)
  • anyone else in your business who will be involved in working with your R&D tax advisor to compile your claim.

Understanding the meaning of R&D for tax purposes is key. It underpins the entire substance of your R&D claim when it comes to demonstrating to HMRC how, exactly, your company qualifies for this relief.

The meaning of R&D for tax purposes is set out at a high level in the purposefully so, to ensure an extensive application is achieved across all industries – including niche and emerging ventures.

Neither the DSIT guidelines for R&D nor provide a specific and definitive list of qualifying project work. This would be impossible to do and would quickly become outdated.

What qualifies as R&D now may not qualify in a few months’ time (depending on the rate of advancement in your industry). What qualifies as R&D continuously evolves.

So, the qualification of R&D must come from you, the claimant company. Specifically, the qualification must come from your science/technology staff, based on the current state of play in your industry, at the time you undertook the work.

It is your niche, your specialism and expertise, your pain points, and the significance of the challenge you are facing in seeking to innovate because of limitations in current practices or gaps around “know how” to create solutions that facilitate the capability you are seeking. These aspects are compared to the headline requirements per the BEIS guidelines for R&D to establish whether they are met in your work.

The qualification criteria are interpretive but how they are applied to your work must be backed up and substantiated to HMRC.

THE ROLE OF r&d tax advisors

The role of an R&D tax advisor is to help the right people in your company understand the meaning of R&D and consider with them how your work can be validated against the qualification criteria.

A good R&D tax advisor will work with your science/technology staff to impart an understanding of what the R&D guidelines require and discuss how your work fits these requirements.

Your R&D tax advisor will be able to ask the right questions, the questions that an HMRC R&D case worker will want to see answered and justified. Together you will be able to surface the facts that determine the significance of challenges faced in your work to reach a decision as to whether your work meets the qualification requirements.

You will collate facts and evidence to support and validate your efforts against the definition of R&D for tax purposes.

when to start thinking about whether your r&d work qualifies

Ideally, you will be thinking about whether your work qualifies as you go along. If you haven’t claimed before or in a while you may need to tell HMRC of your intention to make a claim within six months of the end of your accounting period, and there’s also now an additional form (AIF) to fill in, it’s definitely worth consulting an R&D tax advisor before your current financial accounting period ends.

The standard time limit a company has to make an R&D tax relief claim is two years from the end of the accounting period in which the qualifying work took place. For example, if your accounting period end date is 31 December 2024, you have until 31 December 2026 to make a claim.

Note that qualifying work can span more than one accounting period and so you could be looking at making more than one claim, for successive accounting periods.

However, as of 1 April 2023 (for accounting periods beginning on or after this date), there is an additional, relatively short time limit in which some companies must also notify HMRC of their intention to claim:

  • If you are a UK company that has not made an R&D tax claim within a three-year period ending six months after the end of the accounting period that you wish to submit an R&D claim for, you will only have six months from the end of your accounting period to notify HMRC that you intend to make an R&D claim. This is quite separate from the statutory two-year time limit for making the actual claim (which will still apply). However, if you do not submit the claim notification in time, you lose the ability to make a claim altogether.
  • Going forward, it’s worth making time to consider your eligibility as you start projects that could potentially qualify to ensure you do not miss the notification window. You can involve an R&D tax advisor at any point – not just when you are ready to put the claim together.

Take away point: from 1 April 2023 be aware that the “claim notification” window may also apply in addition to the two-year time limit window. If you fail to notify by then, even if you are in time to claim by reference to the two-year time limit window, you will not be able to do so!

Involving an R&D advisor early on is not only helpful to consider your eligibility. It will also help you to gain knowledge of qualifying activities and associated expenditure. This brings advantages around maximising your claim value and gathering necessary supporting evidence more effectively, which is much easier to do as you go along than retrospectively.

who can’t claim R&D tax relief?

If you’re not carrying out qualifying work as a company subject to UK Corporation Tax (or work attributable to a company that is a corporate partner of a partnership), then you cannot claim at all – this relief is only for UK companies.

working with a specialist R&D chartered tax advisor

Fortus collaborates with people in businesses, large and small (starting out or established) to put together authentic claims for R&D tax relief.

Working closely with the right people in your company, together we’ll identify your qualifying projects and carefully link up associated expenditure to maximise the cash benefits of this tax relief with 100% compliance.

We’ll help you understand the eligibility criteria and guide you through a way to assess your work against this. We’ll look at the areas where you have incurred costs and how these costs can be attributed to the qualifying aspects of your work. And we’ll take the facts we’ll gather throughout the assessment process and produce a robust report for submission to HMRC in support of your claim.

think you have an R&D CLAIM?

Understanding the nuances of tax legislation when it comes to R&D tax relief can be hard. If you hit a road bump in preparations, get in touch.

If you’d like to discuss a potential R&D project, call 0116 490 0279 today to explore your eligibility and start your tax claim journey.

 

 

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