Date posted: 11th Sep 2023
Research and Development (R&D) is a hot topic in the tax profession at the moment, with HMRC clamping down on fraudulent claims. As a consequence of this, we have seen even the most robust of claims being routinely challenged by HMRC.
What is R&D?
Research and Development (R&D) takes place when there has been an advancement in science and/or technology.
Broadly speaking, a project will qualify for R&D relief if it seeks to extend overall knowledge or capability in a field of science and/or technology.
The key to any successful R&D claim is that there must be an advance in science and/or technology, any routine or run-of-the-mill improvements to a process are unlikely to qualify as R&D unless there is the element of advancement.
R&D begins when work to resolve the scientific or technological uncertainty starts and ends when that uncertainty is resolved or work to resolve it ceases.
Subject to certain qualifying criteria a small or medium-sized company can apply to HMRC for advance assurance, where HMRC will provide an opinion on whether the R&D project qualifies or not.
R&D Reliefs:
There are two separate forms of R&D relief:
- The SME scheme; and
- The large company scheme (RDEC).
An SME is broadly a business with:
- Fewer than 500 employees and;
- Either an annual turnover not exceeding €100m or an annual balance sheet (gross assets) figure not exceeding €86m.
The SME Scheme
From 1st April 2023, SMEs will receive an enhanced deduction of 86% of any qualifying R&D spend. So if a business spends £10k on qualifying R&D expenditure, the SME will receive an extra tax deduction of £8,600.
Loss-making SMEs can surrender part of that loss for a repayable tax credit of 10% of the loss surrendered (from 1st April 2023).
The RDEC Scheme
The large company scheme (RDEC) which applies to companies that are not SMEs, and to companies who, generally, receive grant funding for their R&D activities, receives relief in a different way.
From 1st April 2023, a large company will receive a tax credit of 20% of the company’s qualifying R&D spend. However, the RDEC amount is also brought into charge as a taxable source of income.
For example, if a large company had a qualifying R&D spend of £10k, it would bring in a taxable credit of £2k; and once the corporation tax liability had been worked out, the same £2k would be deducted from the ultimate tax liability.
Subject to certain setoffs, an RDEC credit can be repaid to a large company where it is loss-making.
Changes to the R&D Landscape:
In recent budget announcements, there have been several changes to the R&D landscape, with more ways to qualify and changes to expenditure.
- Changes for expenditure incurred on or after 1st April 2023:
To 31st March 2023 From 1st April 2023
- SME expenditure credit 130% 86%
- SME loss credit rate 14.5% 10%
- RDEC Credit Rate 13% 20%
When looking at the uplift of 130%/86%, it is vital that expenditure incurred to 31st March 2023 and from 1st April 2023 is specifically identified, so the correct uplift rate is used; pro-rating isn’t permitted.
Changes Affecting Accounting Periods Beginning on or After 1st April 2023:
First-time relief-claiming businesses (or, broadly, businesses who have not claimed in the last three accounting periods) must submit a “pre-notification” of their claim to HMRC online within six months of the company’s year-end.
Changes Affecting Claims Filed from 8th August 2023:
From 8th August 2023, regardless of the accounting period, there is a requirement for a company to file an “additional information form”.
This form will need to be submitted before the claim is submitted to HMRC and must contain certain particulars about the claim.
Changes Affecting Accounting Periods Beginning on or After 1st April 2024:
The main change here is for restrictions on certain expenditures for overseas subcontracts and Externally Provided Workers (EPWs) not paid through a UK payroll.
It is worth noting this change only impacts third-party costs. Directly employed staff based overseas will not be impacted.
Finally, there is currently a proposal for a single R&D scheme merging the current SME and RDEC regimes from April 2024. No further information is available on this yet, but it is rumoured to be based on the RDEC regime.
If you have any questions regarding Research and Development, or if you are considering making a claim then speak to one of our tax experts here.
