Changes to the SME R&D scheme from 1st April 2023 mean that all expenditure incurs a deduction of 86% (down from 130%), and the SME credit rate changes to 10% (down from 14.5%), except for loss-making SMEs. For businesses claiming RDEC, as of 1st April 2023, the expenditure rate has increased to 20% (up from 13%).
Unfortunately, many companies are wholly unaware that the tax credit exists. Even if they are aware, they might not consider their company’s business-related activities to fall under “Research and development.” At the centre of the government’s plan is a push to educate the public on the existence of the R&D tax credit, including a clear, concise view of the necessary qualifications and process for claiming the benefit.
For accounting periods starting on or after 1 April 2023, businesses planning to claim Research and Development (R&D) tax relief or expenditure credit must now submit a claim form to HMRC if it is your first time claiming, or if your last claim was submitted three years prior to the end of the claim notification period.
Beginning 8 August 2023, there was a new requirement for businesses claiming Research and development (R&D) tax relief or expenditure credit in the UK. This change requires the completion of an additional form to HMRC alongside any claim for R&D tax benefits.
Following the Autumn Statement 2023, starting from 1 April 2024, the existing R&D tax relief schemes for small and medium-sized businesses (SMEs) and the Research and Development Expenditure Credit (RDEC) scheme for larger companies will merge into one scheme. This merged scheme will mostly align with the existing RDEC structure and offer a standard relief rate of 20%.
This aims to simplify the R&D tax relief process by creating a single, streamlined system. In conjunction with the new unified scheme, the more generous SME scheme will remain in place but only for loss-making R&D Intensive Companies.
Loss-making R&D intensive companies are those whose qualifying R&D expenditure constitutes at least 40% (from 1 April 2023) or 30% (from 1 April 2024) of total expenditure (splitting accounting periods as required). 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. While this higher rate is intended to apply for the 2023/24 tax year, it will be legislated for in Finance Bill 2023-24 which is expected to become law in spring 2024, therefore, these relief rates cannot yet be used for accounting purposes.
HMRC is now stepping up its efforts to identify errors and fraudulent R&D tax credit claims by increasing compliance checks. Businesses are advised to review past claims, to thoughtfully respond to HMRC communications, and to prepare for heightened scrutiny moving forward. This includes the necessity of understanding the rationale behind any claims and ensuring they align with HMRC.
If you have doubts about the validity of your R&D claim, our team can help assist in aligning your claim with HMRC’s guidelines. Contact us today for more details and support.
How DS Burge & Co takes the stress out of R&D Tax Credits
- If you need help determining if you qualify for R&D tax relief we can help review your business activities and see if any of your projects meet the specified criteria
- The scope of your project must rise to a certain level in order to qualify for the credit. We can help calculate your qualified costs so you understand what relief you are eligible for
- We can also help with other areas such as VAT returns. Using us to help with your accountancy needs gives you the time to focus on innovating and pushing technological advancements.
- As with other areas of tax, we can act on your behalf for any correspondence with HMRC.
Need help determining if you qualify for R&D tax relief ?
If you'd like to find out more about our R&D tax services or need help calculating your qualified costs, please don't hesitate to get in touch
How Do R&D Tax Credits Work?
The R&D tax credit is designed to reward companies with additional incentives for engaging in research that contributes to their field's prosperity as a whole. The money obtained from R&D tax credit utilization can easily be reinvested in your company, letting you hire staff and get the resources necessary to scale your operations to meet the demands of your innovation.
Research-based tax relief can come in several different forms depending on your company's size and the scheme under which you file. Those schemes include:
- Small and medium-sized enterprises (SME) tax relief, including both profitable and loss-making companies
- Research and development expenditure credit (RDEC)
Therefore, depending on which scheme you are eligible for, you may receive your tax relief in any of the following ways:
- Cash rebate
- Corporate tax relief
No matter which scheme you qualify for, the R&D tax credit is built with flexibility in mind. You may apply for relief up to two accounting cycles (24 months) after your R&D activities have concluded.
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Claiming R&D Tax Credits
Eligible projects
The R&D tax credit offers businesses an attractive incentive to engage in business-related research, but how do you know if your project qualifies? Fortunately, the government gives a clear prescription for eligibility.
Your innovative venture must be scientific or technological advancement, and it must be concrete; you cannot gain tax relief for something theoretical without a clear application to an existing industry. To know if your project qualifies for R&D tax relief, you must be able to answer these four questions:
- Does my research seek to make advancements in my field?
- Have qualified professionals within my field previously been unable to solve this particular problem?
- Was the efficacy of my proposed solution surrounded by uncertainty before I completed my research?
- Can I demonstrate a clear and repeatable method for eliminating that uncertainty?
Qualifying costs
The scope of your project must rise to a certain level in order to qualify for the credit. Assuming it does, what costs are you able to include when calculating your benefit?
- Staffing costs, including salaries and retirement contributions
- All subcontractors used in pursuit of the research
- Many types of specialized software
- Consumable items
- Payments to clinical trial volunteers
- Data licences and cloud computing software (new addition to qualifying expenditure as of 1st April 2023
According to HRMC, the following costs are unfortunately excluded when figuring your relief amount:
- Production of goods and services
- All capital expenditures
- Infrastructure such as land
- Trademark development
Commonly asked questions
What happens if your project fails to achieve the proposed solution? As long as the research effort was made in good faith, you are still eligible to claim your expenditures. If your business is in the process of shedding costs and is loss-taking, you're still eligible for the benefit as well.
What if your UK-based company is currently operating overseas? You still qualify for R&D relief as long as you meet your corporate taxation obligations. So everything is clear; if you are a subcontractor doing work toward R&D for a larger firm, chances are you qualify as well.
Types of credits
As previously mentioned, two different kinds of schemes are available for those looking to take advantage of R&D tax relief. The first is SME R&D relief which is aimed at small to medium businesses. You qualify for the SME relief if your business:
- Has less than 500 employees
- Revenue less than €100 million per year
- Less than €86 million in gross assets
The SME relief allows your company to deduct 86% of your qualifying costs and the 100% standard deduction for a combined 186% deduction from your yearly profit statement. If your business is loss-making, you qualify for a tax credit equal to 10% of your surrenderable loss.
For a profit-making SME, we can “enhance” the R&D expenditure by an additional 86% to reduce the company’s corporation tax.
For a loss-making SME, we have a few options available to us. The first two work in the same way as the profit-making SME example above. The final one results in a cash refund and is often the route taken:
- Carried back to the previous accounting period
- Carried forward and offset against future profits
- Surrendered to HMRC in return for a tax credit (example below):
| Item | Before 1 April 2023 | After 1 April 2023 |
|---|---|---|
| Taxable profits (before R&D claim) | £400,000 | £400,000 |
| Corporation Tax liability on profit (19% to 25%) | £76,000 | £100,000 |
| R&D expenditure (included in the profits above) | £100,000 | £100,000 |
| Tax credit value of R&D expenditure (130% to 86%) | £130,000 | £86,000 |
| Adjusted taxable profit before corporation tax | £270,000 | £314,000 |
| Adjusted Corporation Tax liability (19% to 25%) | £51,300 | £78,500 |
| Corporation Tax Saving | £24,700 | £21,500 |
| Item | Before 1 April 2023 | After 1 April 2023 | ||
|---|---|---|---|---|
| Trading Loss before R&D Expenditure | £150,000 | £150,000 | ||
| Corporation Tax (not applicable as making a loss) | £0 | £0 | ||
| R&D Expenditure | £50,000 | £50,000 | ||
| Trading Loss including R&D Expenditure | £200,000 | £200,000 | ||
| Surrenderable loss is the lower of: | ||||
| – Unrelieved Trading Loss; and | £200,000 | £200,000 | ||
| – 230% to 186% of Qualifying R&D expenditure | £115,000 | £93,000 | ||
| £115,000 | £93,000 | |||
| Cash Refund (tax credit) for R&D activity (14.5% to 10.0% of Surrenderable Loss) | £16,675 | £9,300 | ||
The RDEC works slightly differently. It is reserved for larger-scale companies. As of 1st April 2023, it is a simple above-the-line tax credit of 20%. While the RDEC is a boon to more sizable businesses, the R&D relief program has already proven to have a profound effect on small and medium businesses, with over 60,000 having taken advantage of the program over the years, according to the previously-referenced Accountancy Daily article.
| Item | No Claim | RDEC Claim Before 1 April 2023 | RDEC Claim After 1 April 2023 |
|---|---|---|---|
| Turnover | £1,000,000 | £1,000,000 | £1,000,000 |
| Other Expenditure | -£500,000 | -£500,000 | -£500,000 |
| R&D Expenditure | -£100,000 | -£100,000 | -£100,000 |
| Profit/(Loss) Before Tax | £400,000 | £400,000 | £400,000 |
| Corporation Tax Charge before RDEC Claim (19% to 25%) | £76,000 | £76,000 | £100,000 |
| RDEC Credit (13% to 20%) | £13,000 | £20,000 | |
| Profit/(Loss) Before Tax | £413,000 | £420,000 | |
| Corporation Tax Charge (19% to 25%) | £78,470 | £79,800 | |
| RDEC Credit | -£13,000 | -£20,000 | |
| Corporation Tax Payable | £65,470 | £59,800 | |
| Net Saved in Corporation Tax | £10,530 | £40,200 | |
| Net Benefit % | 10.53% | 40.20% |
R&D in action
Progress and innovation can be grey areas, no matter the strictures that the government definitions put on them. Some real-world applications for R&D include (but are not limited to):
- Researching new raw materials
- Environmental performance and green initiatives
- Advancements in automation
- New, large-scale IT infrastructure
- Construction-based building process design and development
- Updates to existing recipes or formulas to promote health, safety, and regulatory compliance