18th November 2022
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.
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:
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.
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:
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:
SME R&D relief allows companies to:
Example of a potential repayable credit for SME
You can claim Research and Development Expenditure Credit (RDEC) if the following apply:
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.
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:
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.
Hopefully, this brief overview has given you a better understanding of how R&D tax credits could benefit your business. 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 (01395 279521, PLewis@tjllp.com)
