Research and Development ("R&D") Tax Relief is a tax incentive provided by the UK government to encourage innovation and can provide significant benefits for businesses.
R&D is undertaken where a project seeks to achieve an advance in science or technology through the resolution of scientific or technological uncertainty.
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The definition of R&D is broad and can encompass a whole range of activities associated with a company’s products and processes. The innovation needs to be an improvement in the overall knowledge in the relevant field of research, not just an advancement for the company itself. The project does not need to be successful in resolving the uncertainties for the relief to apply.
Qualifying activities could include developing an existing product where there is some technological uncertainty that can be improved, making an improvement to a product or process, or carrying out pure mathematics.
To qualify, the project must aim to achieve an advance in science or technology and overcome scientific or technological uncertainty that cannot easily be worked out by a professional in the field.
To benefit from R&D Tax Relief, the qualifying R&D expenditure must sit within the company that will benefit from the R&D project e.g., by selling the product created as a result of the R&D process.
This is particularly important in companies that are part of a group, as the R&D expenditure must be accounted for in the group company that will hold the relevant intellectual property.
Qualifying expenditure can relate directly or indirectly to the R&D project and may fall into the following different categories:
The SME R&D scheme is available to any company which does not receive any grants or other subsidy towards its R&D projects and falls below the following thresholds:
The SME R&D scheme offers an additional deduction of 86% of the qualifying expenditure when calculating the company’s taxable profits. For loss-making companies, there is an option of a cash repayment at 10% of the surrenderable losses.
There is a PAYE cap for the SME scheme, which restricts the amount of payable R&D tax credit that an SME can claim to £20,000 plus 300% of the company’s total PAYE and National Insurance liability for the period. However, there are exemptions to the cap, where:
Where the SME R&D scheme is not available, a company may be able to make a claim under the RDEC scheme. From 1 April 2023, this scheme offers a tax credit of 20% of the qualifying expenses.
This credit is taxable at either 19%, 25%, or the company’s marginal rate of tax (current rates) and either reduce the amount of Corporation Tax payable or creates a repayment due to the company, provided certain conditions are met e.g., the repayment will be restricted to the company’s total expenditure on R&D workers’ PAYE and National Insurance.
The pre-notification requirement has now come into effect from 1 April 2023. HM Revenue and Customs will require companies claiming R&D Tax Relief to pre-notify them of their intention to claim no later than six months following their financial year-end.
However, if the company has made an R&D claim in one of the preceding three accounting periods, then this pre-notification is not required.
From 1 August 2023, all R&D Tax Relief claims will have to be made digitally except for those companies who are exempt from filing their Corporation Tax return online.
A new additional information form will also need to be filed alongside the Corporation Tax return providing a description of the R&D work together with a breakdown of the qualifying R&D expenditure. This will need to be endorsed by a named senior officer of the company and include the details of any agent that has advised the company.
Initially, the exclusion of any expenditure on R&D work performed by overseas subcontractors and externally provided workers for R&D Tax Relief was to come into effect from 1 April 2023 however HM Revenue and Customs have now delayed this until 1 April 2024.
There are some narrow exemptions from this if the R&D work has to be carried out overseas as the work requires conditions that are not present within the UK. These exemptions are unlikely to be available to most companies that conduct R&D work outside of the UK.
The government has recently undertaken a consultation to simplify the R&D tax relief system which they hope will drive innovation and grow the economy. This consultation proposed a single scheme to replace the current SME and RDEC schemes.
The consultation ended on 13 March 2023 with any changes from the outcome being implemented on 1 April 2024.
If any of the above affects you or you would like to discuss R&D further, please do not hesitate to contact our team.