The R&D tax relief guide for businesses
Here are several types of tax relief that limited companies can claim for R&D related activities.
Does R&D tax relief apply to everyone?
If your company spends money on research and development, such as creating new products, services, or processes - or improving existing ones - you may be able to claim tax relief.
R&D tax relief is available to all UK companies, regardless of size. R&D projects don't matter if they fail in their objectives, or even if a company loses money. The main thing is that qualifying R&D was performed, and the business is a limited company.
What are the R&D costs that I can claim?
Projects and costs eligible for the program span virtually every industry. Your innovation must have involved some level of scientific or technical uncertainty. It should benefit not only your company but also the wider industry in which you operate.
The eligible costs for each R&D project are unique. Here are some common ones to include as a guide:
Salaries, overtime payments, and wages for employees
Contributions to NICs by employers
Subcontractor, freelancer, and externally provided workers (EPW) costs
Clinical trial payments to volunteers
Software (that was tailored specifically for the R&D project itself, rather than bought 'off the shelf')
Consumables (such as electricity, heat, and water)
You should seek advice if you’re considering claiming R&D tax relief, as this isn’t an exhaustive list. There may be tax reliefs available for innovative companies working in creative industries as well.
Is it possible to claim R&D tax relief if the project fails?
The research and innovation you put into the development process can still qualify your company for tax relief, even if the project ultimately fails.
The R&D relief for overseas EPW and subcontractor costs has been removed
The majority of externally provided workers or subcontractors based overseas will not be able to claim R&D expenses after April 1, 2024.
If the work is classified as 'qualifying overseas expenditure' (QOE), you may still qualify for tax relief. Suppose, for example, the UK was unsuitable for undertaking the R&D. As an example, HMRC uses the example of placing sensors on a volcano.
What is the process of R&D tax relief?
Profit-making companies can claim R&D credits against their Corporation Tax bill in order to reduce their tax bill. Alternatively, cash payments can be made to organisations that are losing money.
How should I proceed with R&D?
Different schemes apply based on your company's size and the accounting period for which you are claiming relief.
Tax relief for R&D for accounting periods beginning before April 1, 2024
You must apply for R&D tax relief according to your eligibility for accounting periods beginning before April 2024:
SME scheme:
A company with fewer than 500 employees
An annual turnover of less than €100 million, or a balance sheet less than €86 million
Research and Development Expenditure Credit (RDEC) scheme
A company that exceeds these figures, or has received notified state aid, will need to apply through RDEC.
Small and medium-sized businesses can benefit from the SME scheme, especially if they have limited funding for R&D activities. Due to this, SME R&D relief is higher than RDEC relief, which is available to larger, well-established companies.
In addition to the way they are accounted for in your bookkeeping, there is another vital difference between them.
Since the RDEC scheme is what's known as an 'above the line' scheme, any tax credits you receive will be taxed as income by Corporation Tax. SME schemes are 'below the line', so they're not.
Under the SME R&D scheme, how much can I claim?
Under the SME scheme, companies can claim tax relief on R&D using an 'additional deduction rate'. Therefore, you can:
The amount you spend on R&D can be deducted 100% (just as if you were claiming allowable expenses).
Again, deduct a percentage of that amount
The additional deduction rate for accounting periods beginning 1st April 2023 is 86%. R&D spending that qualifies for R&D relief can be deducted at 100% from a company's profits, with an additional 86% deducted to make a total deduction of 186%.
If your company makes a loss, you can also claim a payable tax credit:
10% of the loss that can be surrendered
If the company is considered research intensive, 14.5% of the surrenderable loss is allocated to it
It is likely that your SME is 'research intensive', and the amount it spends on R&D activities accounts for a considerable portion of its total spending.
If you wish to claim for claims in accounting periods up to 31st March 2024, your R&D spending must account for 40% or more.
Is there a cap on how much you can claim from RDEC?
Research and Development Expenditure Credit (RDEC) is a tax credit applied against a company's tax bill. Expenditure credit rates are calculated as a percentage of R&D spending.
For example, if you spend £100,000 on R&D between 1st April 2023 and 31st March 2024, you can claim 20% of it back, or £20,000.
It is important to remember that RDEC is an above-the-line credit. You will have to pay Corporation Tax on the credit if it is categorised as 'above the line' in your books.
For accounting periods starting after April 1, 2024, it is possible to claim R&D tax relief?
All companies claiming tax relief for accounting periods beginning on 1st April 2024 are covered by a single merged R&D expenditure credit scheme (RDEC). If a company makes a loss or has no profits over £50,000, it can receive credit at a rate of 20%.
Enhanced Research and Development intensive support may also be available to companies that make losses.
A more intensive R&D support program for small businesses
A company must qualify as a small to medium-sized business, make a loss, and spend at least 30% of its budget on research and development to receive this enhanced support.
Companies with R&D spending below 30% can still receive relief for one year if they dip below the threshold.
What are the benefits of enhanced R&D intensive support?
Prior to the merger, SMEs could receive enhanced R&D intensive support. Accounting periods beginning after 1st April 2024 may qualify for enhanced support claims in the following ways:
An additional 86% of the qualifying costs can be deducted (on top of your standard 100% deduction, for a total deduction of 1868).
A payable tax credit of up to 14.5% can be claimed for surrenderable losses
Can I claim R&D tax credit relief by a certain date?
R&D claims can be made up to two years after the end of an accounting period.
For a period of accounting from 1st April 2023 to 31st March 2024, the deadline for claiming an R&D tax credit is midnight on 31st March 2026.
If I want to apply for R&D tax relief, what should I do?
In accounting periods beginning on or after 1st April 2023, R&D tax relief claims are processed differently.
For your R&D claim to be valid, you may have to submit a Claim Notification form.
This is basically a pre-notification telling HMRC that you plan to claim R&D for that accounting period. Unless you have previously claimed R&D relief, you will need to use a digital service to pre-notify HMRC that you plan to claim R&D relief.
The Claim Notification can be sent from the beginning of the accounting period, but it must be submitted within six months after the end of the period. A company's tax return can include details of eligible R&D expenditures.
You should ensure that the UTR number and accounting period details on your Claim Notification match those on your CT600 Company Tax Return if you run multiple companies or work with many partners.
How to make a claim for R&D
The CIRD Manual outlines the general rules and eligibility for R&D tax relief, which is a good place to start.
Providing an overview of the project
It is important that you describe your R&D project and its associated costs clearly in your claim. In what ways did the project attempt to overcome these challenges and uncertainties faced in a particular field?
In addition, you must include the contact information for anyone who helped you prepare your R&D claim, as well as any professional firms.
The number of externally provided workers and their PAYE scheme references will also need to be included in the R&D report.
It will be required starting in April 2023 to break down eligible project costs under the following headings:
Cloud computing services and data licences
Contributions to independent R&D
Correct SIC code
What costs are the result of eligible indirect activities
How many projects make up your claim
Contact Zyla Accountants today for support with your R&D claim.