Is your company eligible for Research and Development tax relief?
Did you know that in the 2023 Spring Budget, Jeremy Hunt announced changes to Research and Development reliefs that will equate to an extra £50 million of R&D expenditure in 2023/24?
Research and Development (R&D) reliefs provide support to companies that focus on innovative scientific and technological projects. The reliefs allow companies in the UK to continue to be a driving force of advancement on the world’s stage. However, this is inevitably subject to the government’s control over R&D relief rates. R&D reliefs can be tricky to navigate, which is why we’re on hand to break down the different R&D schemes available for different businesses.
To claim R&D relief, you must be able to explain how your project:
- looked for an advance in science and technology
- had to overcome uncertainty
- tried to overcome this uncertainty
- could not be worked out easily by a professional in the field.
What reliefs are available?
There are three R&D relief schemes; Research and Development Allowance (RDA); Small and Medium Enterprises Research and Development Relief (SME R&D Relief); and Research and Development Expenditure Credit (RDEC).
First, it’s important to know that Research and Development Allowance (RDA) typically gives traders relief for 100% of qualifying expenditure on research and development. In this instance, qualifying expenditure refers to capital expenditure that is incurred on research and development directly carried out by the trader, or on the trader’s behalf. This is provided that:
- the research and development is related to a trade that the trader carries on, or
- the trader sets up and commences a trade connected with the research and development.
This relief is similar to the Annual Investment Allowance, except isn’t limited to £1 million of capital expenditure.
For SMEs with less than 500 staff, and a turnover of under €100 million or a balance sheet total under €86 million, SME R&D relief can be claimed. This allows the company to deduct an extra 86% of their qualifying costs, on top of the 100% RDA deduction (total deduction – 186%).
For a profitable company, this effectively reduces the tax bill by 21.5% of the R&D expenditure (this reduces slightly if the company’s profits are small and it pays tax at only 19%).
Loss-making companies can surrender their R&D-related losses for a tax credit. This is normally at 10% of the loss, but there is an enhanced credit rate of 14.5% for loss-making R&D intensive SMEs. The enhanced credit allows loss-making R&D intensive SMEs to claim a credit worth £27 for every £100 they spend, whereas most companies can only reclaim £18.60.
(To qualify as R&D intensive, a company must spend 40% of their total expenditure on R&D.)
The Research and Development Expenditure Credit (RDEC) rate is available to large companies and SMEs that do not qualify for SME R&D relief. The RDEC allows companies to claim a 20% cash credit back on qualifying R&D expenditure. This is taxable at the main rate of corporation tax, so the net cash credit is only 16% of the expenditure.
What research and development costs can be claimed
Throughout the course of an R&D project, there are certain costs that R&D relief can be claimed for. These include:
- Employee costs
- Subcontractor costs (only for the SME scheme)
- Software
- Consumable items
- Payments to clinical trials volunteers
There are some costs which cannot be claimed, such as:
- The production and distribution of goods and services
- Capital expenditure
- The cost of land
- The cost of patents and trademarks
- Rent or rates.
All of the above is subject to fairly complex rules limiting the qualifying expenditure, and there are also a number of reporting requirements in addition to the normal corporation tax return process. HMRC are focusing their attention on R&D claims at the moment, and so care must be taken in preparing and submitting any claim for relief.
If you have any questions about any issues covered in this article, or would like further advice about your finances, please contact us on 023 8033 2733.
For more tax updates and accountancy news, check out our latest news.