Within the Prime Minister’s Build Back Better: our plan for growth he commented: “Our mission is to unleash the potential of our whole country and restore the energy and confidence of the Victorians themselves” and “We will make our country a science and technology superpower.”
To achieve this superpower status, the Government is increasing public Research and Development (R&D) investment to record levels, providing £20 billion across the UK by 2024-25, including funding for EU programmes.
The availability of R&D tax credits plays a significant part in this drive to incentivise investment by reducing the costs of innovation. The Chancellor announced in the Autumn Budget that R&D reliefs will be reformed from April 2023, expanding the scope of qualifying expenditure to include cloud computing and data costs. Government support through the R&D regime will also be refocused towards domestic activity.
R&D relief is highly valued by many businesses in the tech sectors, helping them invest in innovation and carry out projects more efficiently than they would have otherwise been able.
Within our own region we can see an escalating focus on advancements in science and technology, evidenced in such initiatives as the Cambridge Norwich Tech Corridor – a partnership that aims to create the essential conditions to attract and support businesses within these industries.
It is not just traditional science and technology businesses that can benefit from the relief though, and with significant reforms to the scheme on the horizon, it is an opportune time to consider what projects R&D tax credits might be applicable to.
Is R&D relief being fully utilised?
A research published in 2019 showed that 21% of eligible engineering companies were not claiming the R&D credits potentially eligible for them. It is surprising just how many activities could actually qualify for this generous relief.
What are these qualifying R&D activities?
The Business, Energy and Industrial Strategy (BEIS) define R&D for the purpose of obtaining relief as “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.”
Some of the qualifying initiatives are perhaps unexpected, for example a business can claim R&D even where they have advanced the underlying technology of an off the shelf product by customising it to its own internal systems or processes.
Another example could be where a business has embarked on a collaborative project with a commercial software provider to ensure new software can ‘talk’ to other software, where no such bridging software currently exists in the market.
The definition of a qualifying activity is not clear cut, and many projects that are initially dismissed as not fitting the conventional definition of R&D could be eligible.
What is the relief?
There are two different types of R&D relief, depending on the size of a business.
Small and medium sized enterprises (SME) R&D Relief
This is for SME’s with less than 500 employees and a turnover of under 100 million euros. The scheme enables businesses to
- Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction; and
- Claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss.
Research and Development Expenditure Credit
Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects. It can also be claimed by SMEs and large companies who have been subcontracted to do R&D work by a large company.
The RDEC is a tax credit of 13% of qualifying R&D expenditure.
Applying for R&D relief
Claims for R&D relief can be made up to two years after the end of the accounting period it relates to.
Relief can be claimed by entering enhanced expenditure into the full Company Tax Return form. A report narrating the nature of the R&D project should also be included with the R&D claim.
Advance Assurance
In some instances, where SME companies are claiming R&D for the first time, HMRC is able to guarantee that any R&D claims will be accepted.
How we can help
Our team are experienced in supporting clients with their sector specific R&D claims and we have a variety of factsheets that outline all the details for your industry. Take a look at the resources we have available on our Research and Development page.
If you are currently undergoing an activity that you think might qualify for R&D tax relief, are about to embark on a new initiative, or perhaps are uncertain if an historic project could still be eligible, then get in touch with myself using the contact details below for further guidance.
R&D for SME's