R&D tax relief
Introduction
Research & Development (R&D) tax relief is a measure that was introduced almost three decades ago to incentivise innovation in the UK. This corporation tax relief reduces a liability or in certain circumstances results in a payable tax credit, either way increasing cash to spend in the business, and therefore also benefitting the economy as a whole.
The definition of what constitutes R&D is wide ranging but is often misunderstood, and as a result, the relief may be over- or under-claimed, or sometimes missed entirely. In general terms, if your engineers or technical team spend time improving products or processes or developing solutions to technical uncertainties, performing feasibility assessments or trying to find solutions through iterative processes, or trial and error, this could potentially qualify.
If your team encounters failures, technical challenges or issues in the course of their work, or the completion of a project takes longer than expected, this could also indicate the presence of qualifying activities.
Benefits
There are two different schemes depending on the 'R&D intensity' of a business:
Research and Development Expenditure Credit (RDEC).
- The RDEC is a 20% credit that appears within operating profit, thus increasing EBITDA. This amount is then subject to tax at 25%, and so the net benefit is 15p for every £1 spent.
- If the company is not tax paying (e.g. due to losses incurred, or past losses brought forward) this credit is payable in cash. However in many situations, HMRC will allow a 19% tax rate to be used, thus increasing the payable credit to 16.2%.
Enhanced R&D Intensive Scheme (ERIS)
- If a company is a loss making SME business, and the R&D costs are greater than 30% of the total costs in the business then an enhanced relief can be claimed. It should be noted that this intensity is calculated on the business itself plus any connected businesses anywhere in the world (i.e. groups are treated as one, as are companies owned by the same shareholders).
- This scheme gives an additional tax deduction of 86% of the qualifying costs (i.e. a total of 186%). This entire 186% can be surrendered for cash at a rate of 14.5%, thus resulting in a cash credit at an effective rate of 26.97%.
- As the two schemes are calculated in different ways, if a company is eligible for ERIS, it is not always the most beneficial (especially where the loss for the year is lower than the R&D costs), and so advice should be taken on the most appropriate scheme.
Important points for both schemes
- For accounting periods starting on or after 1 April 2024, non UK contractors (including staff in overseas group companies) can no longer be included in the claim, apart from in specific circumstances where the work could not take place in the UK (crucially it cannot be overseas purely due to cost or availability of workers).
- The cash credit in both schemes is limited to £20,000 plus 300% of the company's PAYE and NIC liability, although there is an exemption that may be available.
- The rules of both of these are complex and so if they could be an issue then specific advice should be taken.
Sectors
Although R&D claims can be made by businesses in many sectors, the most common are in manufacturing, software, food and drinks, healthcare and pharmaceuticals. However in all of these care should be taken to identify eligible activities rather than those that are business as usual.
Time limit
Although claims for R&D can be made up to two years from the end of the accounting period, if a business has not made a claim within the last three years, HMRC must be notified of the intention to claim within six months of the year end (otherwise a claim cannot be made for that period).
Our services
With over 25 years experience of assisting businesses with R&D claims, with clients obtaining benefits of over £35m during that time, Tom Byng can work with you on all aspects of the claim, including identification of R&D activities, preparation of the accompanying report that describes why the work is eligible, cost analysis, calculating the benefits, filing the Additional Information Form, submitting the claim, and managing communication with HMRC.
Our process is bespoke to every client, and in addition to managing the entire process, we can also provide:
- Advice on specific elements
- Feasibility studies
- Training courses on R&D tax incentives
- Review of prior year claims
- Advice on how to notify HMRC of an intention to claim
- Advice on processes to streamline future claims
- Assistance with HMRC enquiries