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R&D tax credits – are you missing out?

Research and development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation. The Autumn Statement of November 17 2022 announced some changes to the available relief from April 2023, but it remains an attractive, and sometimes untapped, tax relief.  The R&D tax credit scheme allows profit making businesses to reduce the tax burden (especially with corporation tax rates on the rise) and loss-making businesses have the option of claiming a payable tax credit.

To be eligible, your business must trade as a UK limited company; other structures, such as self-employment or partnerships, are not eligible. There is a common misconception that R&D tax relief is only applicable to companies that undertake laboratory research work. Instead, it can apply to a wide range of different industries working in a variety of business sectors and is an effective way to reduce a company’s Corporation Tax bill or receive a cash credit. It can be applicable to sectors that you may not expect, such as food and drink, architects, construction, textiles, agriculture and more.

Does my project count as R&D?

Identifying a qualifying project is key. Many companies undertake R&D and don’t make a claim. Others simply don’t realise that they meet the right criteria to make a claim.

The government’s R&D criteria are broad. Whatever sector your business is in and whatever size your company is, if the work involves taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you may be carrying out qualifying activity.

The project must relate to your company’s existing trade, or a business that you intend to start up based on the results of R&D.

The full government criteria can be found here. In summary, to get R&D relief you need to explain how a project:

  • looked for an advance in the overall fields of science and technology
  • could not be easily worked out by a professional in the field, perhaps through showing how other attempts had failed
  • had to overcome uncertainty
  • tried to overcome this uncertainty

Your project may research or develop a new process, product, or service, or improve on an existing one. Its important to remember that R&D doesn’t have to have been successful to qualify.

You can make a claim for R&D relief up to two years after the end of the accounting period it relates to, but from April 2023 draft legislation means claimants will need to notify HMRC of an intention to make a claim within 6 months of the relevant accounting period.

What costs can be claimed through R&D tax credits?

Each R&D project is unique and it’s not always easy to know which costs are covered as the scope is very broad. Claims could include costs for:

  • staff, such as salaries, Class 1 National Insurance and pension contributions
  • subcontractor costs (these have to be UK based from April 2023)
  • consumables
  • software
  • clinical trial volunteers
  • contributions to independent research
  • prototypes

The right scheme to benefit your business

R&D tax credits can generate significant tax savings by reducing your business’s Corporation Tax liability. Or, if your business is making a loss, you can claim a cash repayment. Whichever way, the schemes can be vital in helping you to grow your business.

There are different types of R&D relief, depending on the size of your company and if the project has been subcontracted to you or not.

You can claim SME R&D Relief if you’re an SME with both of the following:

  • fewer than 500 staff
  • a turnover of under €100m or a balance sheet total under €86m

SME R&D relief allows companies to:

  • deduct an extra 130% of their qualifying costs from their yearly profit (from April 2023, this will reduce to 86%)
  • claim a tax credit if the company is making a loss, worth up to 14.5% of the surrenderable loss (from April 2023 this will reduce to 10%) , subject to a cap of £20,000 plus 3 x National Insurance and PAYE liabilities for the period

Example of a potential repayable credit for SME

  • Company loss of £250,000 with £100,000 qualifying R&D expenditure
  • £100,000 x 230% = £230,000 (from April 2023 = £186,000)
  • £230,000 x 14.5% = £33,350 repayment (from April 2023 = £18,600)

You can claim Research and Development Expenditure Credit (RDEC) if the following apply:

  • 500 or more staff
  • a turnover of over €100m or a balance sheet total over €86m
  • SME that cannot claim SME R&D Relief – for example where the SME is carrying out a R&D project on behalf of a large company, or has received a grant or subsidy for their R&D project

RDEC is calculated at 13% of your company’s qualifying R&D expenditure and is taxable as trading income (from April 2023, this will increase to 20%) and so it can be used to offset a corporation tax liability for profitable companies or provide a payable credit where losses are being made. 

Advance Assurance

If your company is applying for SME R&D for the first time, it could qualify for Advance Assurance.

Whilst your company does not need Advance Assurance before it applies for SME R&D, it gives certainty about a claim which is valid for three years, as well as being a tool for attracting investors as it provides reassurance that they’ll receive added tax benefits by investing in the company.

Advance Assurance (AA) is provisional confirmation from HM Revenue and Customs (HMRC) that a R&D claim will be accepted in the first three accounting periods if it is in line with what has been discussed and agreed.

To apply for Advance Assurance you’ll need:

  • your company accounts
  • your company registration documents (from Companies House)
  • HMRC correspondence
  • previous company tax returns (not needed for new companies)
  • the name of a contact with a direct knowledge of your R&D to discuss the application with HMRC
  • basic information about your company and detailed information about your company’s R&D activities.

How we can help

Claiming R&D tax credits is complicated, requiring knowledge and understanding of which businesses and projects will qualify, as well as knowing how to make a successful claim. HMRC are becoming increasingly concerned about incorrect and spurious claims so getting the right advice at the beginning of a claim is important. We prepare R&D tax credits but can also use specialists if required. We manage the whole application on your behalf, making it a hassle-free process by helping to clarify your eligibility, selecting the most appropriate scheme, making an Advance Assurance application where applicable, liaising with HMRC and providing a technical report and tax calculations to support your application. 

Talk to us

We undertake this specialist tax service for our clients – existing and new. For further information or to discuss the contents of this article, please contact Paul Lewis (01392 279521, [email protected])

Hopefully, this brief overview has given you a better understanding of how R&D tax credits could benefit your business. Look out for our next monthly article which will be on EIS and SEIS schemes.