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Research & Development Tax Relief - January 1st 2023

Are you eligible to claim R&D Tax Relief?

Update December 2022


The Chancellor has again expressed concerns about the alleged abuse of Research & Development (R&D) tax reliefs.

Alongside plans to merge two existing schemes in future, he announced that, from 1 April 2023:

  • The Research and Development Expenditure Credit (RDEC) available to non-SME companies would be increased from 13% to 20%.
  • For SME companies, the additional R&D tax relief deduction will be reduced from 130% to 86%.
  • For loss-making SME companies, the payable credit will be reduced from 14.5% to 10%.

You could be (and many companies are) missing out

The Research & Development (R&D) tax credit scheme for small and medium sized enterprise companies is particularly generous as there is currently 230% relief for qualifying expenditure and, where the company is loss making, this results in a 14.5% repayable credit (10% from 1 April 2023). This means that the company receives a £33,350 refund for every £100,000 spent on R&D.

This generous tax break has reportedly resulted in abuse of the system. HMRC have recently paused some repayments while they investigate an increase in irregular claims. Unfortunately, even for legitimate claims, this is going to increase processing times.

For the vast majority of claims, HMRC aims to either pay the payable tax credit or contact the claimant regarding the claim within 40 days instead of the previous 28 day response.

Overview of what the R&D tax credits scheme is

Research and Development (R&D) is a valuable relief the UK government offers in order to incentivise businesses to innovate and enhance productivity. The scheme is widely underutilised and over the course of several budgets the Chancellor of the Exchequer has sought to widen the scope for claiming this relief. 

What projects qualify for R&D tax relief

HMRC have also recently updated and reissued their guidelines on the conditions to be satisfied for a valid R&D claim:

The accountancy definition of R&D is modified for tax purposes by the Guidelines, which are given legal force by Parliamentary Regulations.

Note in particular that R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.

Certain qualifying indirect activities related to the project are also R&D. Activities other than qualifying indirect activities which do not directly contribute to the resolution of scientific or technological uncertainty in an overall project are not R&D.

An advance in science or technology means an advance in overall knowledge or capability in a field of science or technology (not a company’s own state of knowledge alone). This includes the adaptation of knowledge or capability from another field of science or technology in order to make such an advance where this adaptation was not readily deducible by a competent professional in that field.

A process, material, device, product, service or source of knowledge does not become an advance in science or technology simply because science or technology is used in its creation. Work which uses science or technology, but which does not advance scientific or technological capability as a whole is not an advance in science or technology.

If you think that some of the technological developments that are being carried out within your company might qualify as R&D please contact us so that we can consider whether or not you might be eligible to make a valid claim for this generous tax relief.

The criteria to claim – what do companies need to prove?

The scheme itself requires there to be an advance in science or technology. The definition is slightly wider than it sounds insofar that if an advance is sought, but ultimately not achieved because, say, the project failed, then relief may still be available.  So it’s important to be aware of the unsuccessful projects as well as the successful ones.  This can often mean that where there has been some element of trial-and-error, or failed projects, then R&D could have taken place – and a valid claim can still be made.

You have to have attempted a project at your own risk by creating new, or enhancing existing, products, services, software or processes. The R&D has to be contained in a specific project and include, for example, identifiable materials and staff costs. It’s also important that, at the outset of the project, a competent professional in that field would not know how to achieve the advance sought.

Finally, for you to qualify you must be an SME (HMRC definition so must be limited liability and subject to corporation tax). You should have fewer than 500 employees and have either a turnover under €100 million or a balance sheet net asset value lower than €86 million.

Costs which can qualify:

  • Staff
  • Externally provided workers
  • Subcontractors
  • Materials and consumables (including utilities)
  • Payments to the subjects of clinical trials
  • From April 2023 – Data and cloud computing costs

Professional advice is crucial as it can be complex to navigate and therefore crucial to be fully aware of what actually are qualifying costs – and what cannot be claimed.

How Relief is given

Once a claim has been prepared for profit making companies the calculation of the benefit is quite simple. The claim gives an additional 130% deduction in respect of the R&D qualifying expenditure. For a £100,000 spend therefore, the company achieves an additional £130,000 (£86,000 from 1 April 2023) in its corporation tax return and saves tax at the corporation tax rate, currently 19%.

If you are loss-making the situation is slightly different and you are afforded more choices which can increase the rebate value.

Think you may have a claim?

  • Do you design and make products?
  • Do you seek to improve processes, services, materials, or devices?
  • Have you bettered or tried to better a process or product?
  • Do you spend time researching and developing projects?
  • Do you make prototypes or perform testing?
  • Do you develop bespoke software or IT solutions?
  • Have you invested in failed projects or developed products that are never launched?
  • Do you employ any staff with a technical or scientific background?
  • What tricky problems have you encountered and tackled?
  • Have you done anything different this year? What have you looked to change?
  • What have you done to stay competitive in the market?
  • What have you done new?
  • Any Trial-and-Error testing?

If you’ve answered 'yes' to any of the above then it’s worth talking to us and we will put you in touch with experts in the field who will assess your project and let you know if a claim is likely.

Nothing ventured, nothing gained…

Beware of 'Rogue' R&D Consultants

In recent years, HMRC has identified and successfully challenged several false claims for Research and Development (R&D) tax credit relief made by purported R&D Consultants.  Many of these claims have been for projects that did not satisfy the criteria for the tax relief and some included overstated expenditure and consequently have been abusing the scheme.

The number of spurious claims has resulted in HMRC notifying some accounting firms that they are temporarily suspending repayments and requesting additional information to support the R&D claims. HMRC have even started writing to companies alleging that their R&D claim may be fraudulent.

Please contact us if you would like to discuss whether any of the projects carried out by your company potentially qualify for R&D tax relief. Also, let us know if you are contacted by an organisation claiming to be R&D consultants and we can check whether they are legitimate.