Benefits available

R&D Tax Reliefs are aimed at incentivising UK companies to innovate, through increased spending in research and development. Where companies can demonstrate they are developing new, or appreciably improved products, processes, materials, devices, or services, through science or technology, they are eligible to claim a refund on related costs, subject to certain criteria.

As the schemes are administered through the tax system, to make a claim, the claimant must be within the scope of UK corporation tax.

 R&D Tax incentives can be claimed under the following schemes:

(i) the R&D Tax Relief Scheme for Small & Medium sized Entities (SMEs), giving an enhanced deduction of 86% (130% prior to 1 April 2024) on qualifying R&D expenditure.

(ii) the R&D Expenditure Credits (RDEC) Scheme for non-SMEs or large companies providing a credit of 20% (13% prior to 1 April 2024).

(iii) For accounting periods beginning on or after 1 April 2024, all claims will be made under the new Merged R&D Tax Credit Scheme, unless they meet the criteria for the Enhanced R&D Intensive Support (ERIS) Scheme.

(iv) There is a separate scheme for capital expenditure whereby accelerated capital allowances at 100% are available for qualifying expenditure.  This provides an immediate tax deduction on qualifying costs, rather than an additional tax relief available for non-capital expenditure within points (i) and (ii) above.

Summary of benefits available under the new R&D Schemes

Merged Scheme

• Credit of 20% is available on qualifying R&D expenditure.
• The credit can be used for immediate offset against the company’s tax liability for the year.
• Unused credit is receivable in cash (net of tax and subject to a PAYE/NI based cap). The unused/capped credit can be used for offset against future tax liabilities or tax liabilities for other companies in the group.

Enhanced R&D Intensive Support (ERIS)

• This benefit is available for loss-making SMEs who meet the R&D intensity criteria.
• Broadly, the R&D intensity criteria is where the company’s R&D expenditure is at least 40% of its tax- deductible expenditure for the year (30% for periods starting on or after 1 April 2024).
• An enhanced deduction of 86% is available on qualifying R&D expenditure.
• The R&D and related enhanced deduction (i.e 186% of the R&D related expenditure) can be submitted to HMRC in return for cash (subject to a PAYE/NI cap). Cash credit rate is 14.5%.

The R&D Definition

The definition of R&D for the purposes of the Tax incentives schemes is set out in detail within the DSIT (Department for Science, Innovation & Technology) guidelines (updated 7th March 2023). Briefly, for activities/projects to be eligible, they must:

(i) seek to achieve an advance in science or technology; and,

(ii) seek to resolve the associated scientific or technological uncertainty.

With the R&D definition being so broad, companies are tasked with trying to understand how it applies to their specific industry and business. Determining whether an activity meets the ‘Advance’ criteria requires careful consideration of the state of industry knowledge and how the company has sought to further this. In seeking this advance, the company may face scientific or technological uncertainties or in other words, challenges. How these are overcome or attempted to be resolved, determines whether the eligibility criteria have been met. Many companies find it difficult to identify these activities within their business as usual activities or from what they deem as normal problem-solving within their day job.

It is also important to bear in mind that to be eligible, activities are not restricted to developing a new product, process, material, device or service. They can relate to appreciable improvements made, or attempted, to an existing product, process, material, device or service. This can also include using science or technology to duplicate the effect of an existing product/process, material/device but by achieving it in a fundamentally different way (e.g automating a manual process). From 1 April 2023, mathematical advances are included as science for the purposes of these Guidelines.

Note that the straightforward application of information available in the public domain does not constitute eligible activities. However, if a competitor has undertaken similar development activities, but where this information is not available in the public domain, your development activities may be R&D eligible.

Broadly speaking, if your company is engaged in challenging developmental activities that go beyond routine industry practice and publicly available information, there is a good chance these activities will be eligible for R&D tax relief/credits.

What activities can I claim?

There is a misconception that R&D only relates to pure research organisations and high tech organisations. In reality, many businesses may be involved in development activities as part of their day-to-day work. This could range from the development of new products or processes, to significantly enhancing existing ones.

If your company is engaged in challenging developmental activities that go beyond routine industry practice, there is a good chance that some of those activities will be eligible for relief.

Some high-level examples of eligible activities within certain sectors are set out below. This list is by no means exhaustive:

The above are examples are only within illustrative sectors. The definition for R&D is quite broad and can be applied to all sectors including oil & gas, aerospace, utilities and engineering consultancies.

How do I make a claim?

Whilst the R&D tax claim is made within the company’s corporation tax return  (CT600 return) for each accounting period, there are additional steps that must be taken prior to claim submission.

(i) CHECK WHETHER YOU NEED TO TELL HMRC YOU ARE PLANNING TO MAKE A CLAIM

This applies to accounting periods beginning on or after 1 April 2023.

You should tell HMRC you are planning to submit a claim in the following circumstances:

(i) where you’re claiming for the first time;

(ii) you’ve claimed for the previous tax year, but you did not submit that claim until after the last date of the claim notification period for the current period (the claim notification period starts at the beginning of the accounting period and ends 6 months after the end of the period of account);

(iii) your last claim was made more than 3 years before the last date of the claim notification period.

This form can be accessed here.

(ii) SUBMISSION OF DETAILED INFORMATION THROUGH ‘ADDITIONAL INFORMATION FORM’

The completion of the Additional Information Form (AIF) is mandatory.  The form must be completed PRIOR to submitting the R&D claim within the company’s CT600 return. Failure to do so will result in HMRC disallowing the claim.  

The form can be found here.

The Current R&D claims landscape

HMRC ENQUIRIES

HMRC has heavily increased its scrutiny of R&D claims. It is estimated that around 20% of submitted claims are currently being enquired into by HMRC. In almost all these instances, this has resulted in a (downward) claim adjustment, or claim rejection.

LACK OF AWARENESS BY CLAIMANTS OF LATEST GUIDANCE AND REQUIREMENTS

From 8 August 2023, the completion of the Additional Information Form (AIF) is mandatory. The form must be completed PRIOR to submitting the claim within the company’s tax return. HMRC has found that the vast majority of R&D claims submitted after 8 August were done so without the prior completion of the AIF, resulting in claims rejection.

WHAT DOES HMRC LOOK FOR IN SUBMITTED R&D CLAIMS?

• Demonstration that the right people have been involved in the claim preparation. For this purpose, HMRC expects the ‘competent professionals’ to make judgments on R&D eligibility. These are persons who are experts in their field, who have been involved in undertaking the company’s R&D eligible activities. They may be internal staff or external personnel.
• The people involved (i.e the competent professionals mentioned above) have understood the guidelines and definition of R&D for Tax, to enable them to make informed judgments on R&D eligible versus ineligible activities.
• There is a clear articulation in the AIF of why a project is deemed eligible.
• Demonstration that only the correct costs have been included in the claim.

How we can help

FULL CLAIM PREPARATION

The definition of R&D for tax purposes is very broad and requires a very good understanding of the guidelines to make sensible judgements on what activities qualify for the tax reliefs. Additionally, as a project will contain both eligible and ineligible activities, careful consideration and judgments are necessary to identify the start and end of an R&D project, which may be quite different to a commercial project.

Whilst the R&D claim is a number within the company’s corporation tax return, HMRC will seek assurance that the claim has been compiled using a reasonable methodology and includes only qualifying costs.  The completion of project details within the ‘Additional Information’ form is aimed at providing HMRC with further assurance that only eligible activities and related costs have been claimed.

This is where we add value.  Our claim approach is aimed at:

• understanding your business to identify which teams/departments are involved in undertaking eligible activities;
• developing a claim approach that is tailored to your business’s specific reporting systems;
• preparing claim supporting information for submission to HMRC; and,
• answering any queries that HMRC may have in relation to the claim we have prepared.

PROVIDING HMRC ENQUIRY SUPPORT

In the event that HMRC enquires into your claims (and where we have not been involved in the preparation process), we can assist you in responding to these queries, to obtain claim agreement for you. Get in touch with us to discuss how we can help you.

PROVIDING OTHER AD-HOC SUPPORT

We provide training, claim review services as well and any other support that you may require on the claims process. Get in touch with us to discuss your specific requirements.

Already claiming?

We have found that although companies are claiming, their claims may not be fully optimised.

We will be happy to health-check your existing claims against what other companies in your sector are claiming and highlight these opportunities to you.

FAQs

Is R&D only claimable for new product development?

Eligible R&D activities are not restricted to new developments.  Where teams are seeking to make appreciable improvements or enhancements (i.e non-minor or non-straightforward changes) to existing products, processes, materials/devices etc, some of these activities can be eligible, to the extent that they relate to resolving challenges that cannot be resolved after leveraging on publicly available information.

Can a company choose between SME and RDEC schemes?

There are 2 separate schemes under which R&D claims can be made.  Which regime the claims can be made under is dependent on whether (i) the company meets the SME (Small & Medium sized Entity) criteria (see below) and (ii) the types of expenditures incurred.

For SMEs, certain expenditures such as subsidised R&D and expenditures relating to activities subcontracted to the company cannot be claimed under the SME scheme.  The SME can however claim these expenditures under the R&D Expenditure Credit (RDEC)  scheme.  The subcontracting entity for this purpose must not be a SME.

What is a SME for R&D Tax purposes?

To be a SME the company should have:

• Fewer than 500 employees

AND

(ii) Either:

• a turnover of less than €100m or;
• Balance sheet total of less than €86m

The test is applied at a group level and requires consideration of partner enterprises (a shareholding of between 25% to less than 50% in the claimant company or vice-versa) and linked enterprises (generally a shareholding of over 50% or a majority voting right is held in the company) in calculating the abovementioned thresholds.

Can grant-funded expenditure be claimed?

As mentioned above, grant-funded or subsidised expenditure is non-qualifying under the SME R&D scheme.  The SME may however claim these costs under the RDEC scheme.  Note that a key point to check is whether the grant funding is a Notified State Aid grant or not, as the rules for the calculation of qualifying expenditures between notified and non-notified state aid grants differ.

Large companies on the other hand, can claim for subsidised expenditures.

For accounting periods beginning on or after 1 April 2024, all companies can claim for subsidised expenditure.

What is a R&D intensive company?

A SME is a R&D intensive company if it has a R&D intensity of 30% (40% for accounting period beginning on or after 1 April 2024) or above in that period.  The R&D intensive period commences from 1 April 2023.

R&D intensity is calculated as the ratio of the company’s qualifying R&D expenditure (for both the SME and RDEC schemes) for a period to its total expenditure for the same period.

Total expenditure for this purpose will be calculated from the total expenses figure in the profit and loss (P&L) account, adjusted by adding any amount of expenditure used under s1308 Corporation Tax Act (CTA) 2009 and by subtracting any amount not deductible for CT purposes.

To prevent manipulation of the intensity ratio, in calculating the ratio the qualifying R&D expenditure and total expenditure (as described above) of connected companies will be aggregated.

How much benefit can a R&D intensive company claim?

The company can claim the payable credit rate will be 14.5% instead of the 10% credit rate for non-R&D-intensive companies.

Is there a further cap on payable credits?

Yes. For SMEs, the payable R&D tax credit is capped at £20,000 plus 300% of the company’s total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liability for the period.

A company is exempt from the cap if:

• its employees are creating, preparing to create or managing Intellectual Property (IP) and
• it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons

See our blog here for more information.

For Large companies claiming under the RDEC scheme, the R&D payable credit for any one period is also subject to a PAYE and NI-based cap. This calculation is different from the SME payable credit cap.

Can I claim for capitalised R&D expenditure?

There is a separate scheme for capital expenditure incurred on assets used in R&D or for facilitating R&D, whereby accelerated capital allowances at the rate of 100% are claimable.  Certain revenue expenditure may also be capitalised as an asset on the balance sheet. R&D Tax reliefs are claimable on this expenditure.  What is revenue versus capital expenditure can be complicated to determine.  Do get in touch with us for a further discussion.

Can I claim for failed projects?

Absolutely!  Where a project has failed due to the inability to achieve the high technological objectives sought and resultant challenges faced, then it is a good indicator of R&D and lack of readily available information in the public domain to resolve the challenges faced.

What information does the AIF (Additional Information form) require?

There is a detailed description of information that will be required on the AIF.  This information can be found here:

Key points to note are that If you’re claiming:

• for 1 to 3 projects, you need to describe all the projects you’re claiming for that cover 100% of the qualifying expenditure

• for 4 to 10 projects, you need to describe those projects that account for at least 50% of the total expenditure, with a minimum of 3 projects described

• for 11 to 100 (or more) projects, you need to describe those projects that account for at least 50% of the total expenditure, with a minimum of 3 projects described — if the qualifying expenditure is split across multiple smaller projects, describe the 10 with the most qualifying expenditure.

 The form requires a summary of expenditure incurred on each project described within the AIF.

Can I make retrospective claims?

Yes. The R&D claim submission deadline is 1 year from the deadline of the submission of the company’s corporation tax return.

For accounting periods starting on or after 1 April 2023, whilst claims can be made retrospectively, there is a new requirement to notify HMRC of the company’s intention to make a claim.  This would be under the following circumstances:

• where you’re claiming for the first time

• your last claim was made more than 3 years before the last date of the claim notification period;

• you’ve claimed for the previous tax year, but you did not submit that claim until after the last date of the claim notification period (the claim notification period begins on the first day of the accounting period and ends 6 months after the end of the period of account).