As a business owner, you want to increase the amount of money coming into your company and minimise the amount going out, particularly where tax is concerned.
One way for innovative businesses to reduce their tax bills is to claim Research and Development (R&D) tax credits.
What is R&D Tax Relief?
The R&D Tax Relief Scheme was introduced in the UK in 2000 to support, reward and encourage companies undertaking research and development (R&D).
This is relief may help to reduce your company’s Corporation Tax bill or in some cases will result in a payable tax credit.
Who can claim?
Small to medium-sized enterprises (SMEs) can claim R&D tax credits through the SME scheme. It is open to solvent registered companies with fewer than 500 staff, and a turnover of under €100 million or a balance sheet total under €86 million.
As long as the company is carrying out eligible R&D projects it should be eligible to make a claim.
Companies with more than 500 staff or a turnover of over €100 million and a balance sheet total over €86 million are classed as a large company under the scheme and can claim a Research and Development Expenditure Credit (RDEC) instead.
What is an eligible project?
A business must first determine whether their R&D project is eligible before they consider their eligible expenditure. This can sometimes be the hardest part of an R&D claim as it depends on several important criteria.
For your project to qualify you will need to show that it:
- Aimed to make an advance in an area of science and technology
- Involved technological uncertainty
- Made efforts to overcome this uncertainty
- Couldn’t have been easily worked out by a professional in the field
In short, if your company has a technical specialist in their field and they aren’t sure if they can achieve the scientific or technological aims of the project, you’ve got technical uncertainty!
What is ‘eligible expenditure’?
Once you’ve worked out which projects are eligible for R&D tax relief, you will need to identify what the eligible costs associated with the work are. These fall into five main categories:
- Staff costs, including pensions and bonuses
- Subcontracted costs
- Raw material costs
- Utility costs
- Software costs.
When collating costs, you should make sure that these align with your company’s profit and loss for the year so that HMRC can see how these costs link in with your financial statements for the year.
HMRC will also expect any apportionments applied to R&D costs to be fair and reasonable.
In some cases, HMRC will apply more advanced criteria around what costs are eligible, so if you are unsure and would like to find out more, please contact us today.
Be aware of the PAYE cap, which could affect the value of surrendered tax credit claims.
This prevents abuse of the R&D tax credit system by limiting the amount of payable R&D tax credit that an SME can claim to just £20,000, plus 300 per cent of its PAYE & NIC liabilities.
A company making a small claim for payable credit below £20,000 will not be affected by the cap, but those that are not exempt from this rule will face new challenges.
A company’s claim will be exempt from the new measures if it meets two tests:
- A business’s employees are creating, preparing to create or actively managing intellectual property (IP); and
- Its expenditure on work subcontracted to, or externally provided workers (EPWs) provided by, a related party is less than 15 per cent of its overall R&D expenditure.
Under these new rules, companies that are heavily reliant on subcontracted work for their R&D projects may find that they are limited as to how much tax relief they can obtain.
How can you claim R&D tax credits and what are the deadlines?
Making an R&D claim allows you to do one of the following:
- Reduce your Corporation Tax liability for the period
- Get a refund of corporation tax that has already been paid
- Receive a tax credit (in the case of loss-making companies).
To claim R&D tax relief you will need to enter the claim on your CT600 Corporation Tax return form and complete the Additional Information Form (AIF).
Additionally, HMRC expects a clear R&D report to be submitted alongside the worked calculations for the R&D claim.
This narrative report is what HMRC reviews to determine if you meet all their criteria for R&D eligibility, so it is important to produce a robust report for a claim to be successful.
The timelines for claiming R&D tax credits are strict – you must submit any R&D claim within two years of the end of the accounting period in which the work took place.
HMRC will not process any claims submitted after this deadline, which could lead to you missing out on huge tax benefits.
The RDEC scheme – how it relates to small companies
Another less generous scheme is available to large companies who wish to make an R&D claim (see Scheme Eligibility section above).
This provides an ‘above the line’ 13 per cent tax credit to the company for eligible R&D costs. This tax credit then reduces any Corporation Tax liability the company has for that period.
However, this scheme is also available to small or medium companies that want to make an R&D claim, but do not qualify for using the SME scheme.
Reasons a small or medium company may not qualify for the SME scheme:
- They have received notified state aid for a specific R&D project
- They have received general notified state aid that they have used on funding an R&D project(s).
The newly merged scheme
The UK is consolidating its R&D tax relief incentives into a unified scheme, merging Enhanced tax relief and payable credits for SMEs with the R&D expenditure credit (RDEC) for large businesses and certain SMEs into a single, streamlined system.
This new approach is designed to simplify the process with modifications to mirror the current RDEC framework.
The transition to this merged scheme impacts entities currently benefiting from R&D tax relief, with variations in applicability based on the business size and the nature of contractual R&D arrangements.
SMEs, defined as having fewer than 500 employees and either a turnover of under €100 million or gross assets below €86 million, must ascertain their eligibility for either the R&D intensive incentive or the merged scheme.
Critically, companies contracted to perform R&D activities on behalf of another company may not qualify for claims under this scheme.
In the merged scheme, companies generating profits will benefit from relief at the RDEC rate of 20% (after accounting for Corporation Tax), which translates into a net advantage of 15% for the majority. Conversely, companies operating at a loss will see the applicable tax rate reduced to 19%, resulting in a credit payment equal to 16.2% of their eligible R&D spend.
This consolidated scheme is set to apply from accounting periods beginning on or after 1 April 2024. However, the actual transition date for businesses will depend on their accounting period dates, simplifying the changeover without necessitating claims under different regimes for periods straddling the implementation date. This staged introduction aims for a smoother transition than initially anticipated for some businesses.
How Lamont Pridmore can help
We have a proven track record of helping businesses of all sizes, across a wide range of sectors, make significant tax savings by taking advantage of the reliefs they are entitled to.
Even if you are not sure whether you qualify, it is always worth seeking advice to ensure you are not missing out on what is rightfully yours.
To find out how Lamont Pridmore can help you, please contact us.
