Cash flow management is crucial during this challenging time; if your business incurs R&D expenditure, you may be able to reduce your corporate tax bill.
R&D Tax Relief allows eligible profitable and loss-making small and medium-sized enterprises (SMEs) to claim relief of around 20% of qualifying R&D expenditure.
The R&D tax relief scheme underwent a significant overhaul in 2024.
Related Article | R&D tax relief has changed: What does this mean for CFOs in 2024?
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(Updated April 2024)
In this blog, we answer the following questions:
- What is R&D Tax Relief?
- What types of activities count as R&D?
- What’s the difference between R&D Tax Relief and R&D Expenditure Credit?
- What are the eligibility criteria?
We also outline the application process and reveal some valuable hints and tips for submitting a successful application.
What is R&D Tax Relief?
R&D Tax Relief is a valuable source of funds designed to reward UK companies for investing in innovation, facilitating job creation, and driving growth.
This can be a beneficial injection of funds and act as a catalyst to accelerate a company’s R&D capabilities.
HMRC is responsible for administering and processing R&D Tax Relief claims through the Corporation Tax system.
What types of activities count as R&D?
R&D for tax purposes is much broader than, for example:
- Statistical modelling and programming
- Responsive web apps
- Legacy migration
- Development of applications for existing drugs or medical devices
- Design and development of new machine prototypes
- Establishing new manufacturing processes
- Advances in engineering to develop new or unique materials
- Product development using computer-aided tools
- Streamlining manufacturing processes through automation
- Elimination of allergens, preservatives, or artificial dyes in foods
Additionally, UK R&D Tax Relief is not restricted to traditional industries with high R&D costs, such as biotechnology, software, or life sciences. The support is also available to other sectors, including most technology companies, financial services, process engineering and manufacturing, construction, and civil engineering.
What has changed in 2024?
Merged scheme
There’s one merged scheme for all companies.
Additionally, there’s a scheme with a more generous basis of calculation for only loss-making R&D-intensive SMEs.
The expenditure rules are the same for both forms of relief. For work done under contract, the party that initiated the R&D project is generally the party that can claim.
Any company conducting qualifying R&D expenditure can now claim under the merged scheme.
The changes focus on streamlining the R&D tax relief structure, aiming to establish a singular, straightforward scheme with standardised rules for all participants.
Additionally, a restriction on third-party payees has been implemented, ensuring that only the claiming company is eligible to receive the cash. This modification is intended to address concerns related to less reputable advisers.
Lastly, the R&D Review, which has been in progress for several years, has closed.
Enhanced R&D intensive support
Enhanced R&D intensive support is calculated in the same way as the previous scheme before 1 April 2024.
Businesses can claim for this enhanced support if it meets the following criteria:
- An SME with less than 500 staff and a turnover of under 100 million euros or a balance sheet total under 86 million euros.
- If it makes a trading loss for tax purposes before relief is calculated
- If the business meets the R&D intensity condition, with an R&D intensity of at least 30%
The same expenditure rules apply as for the merged scheme.
For further details, please see the government website.
What eligibility criteria must the project meet?
For the receipt of R&D Tax Credits, a project needs to meet the following criteria:
- To claim, you need to explain how a project:
– Looked for an advance in the field
– Had to overcome scientific or technological uncertainty
– Tried to overcome scientific or technological uncertainty
– Could not be easily worked out by a professional in the field
Caution: HMRC has expanded its enforcement efforts
To minimise inaccuracies, fraudulent activities, and misuse of the scheme, HMRC has embraced a more assertive stance toward compliance. With approximately 25% of SME claims purportedly involving ‘error and fraud’, slightly over £1 billion in relief is disbursed to companies that HMRC deems ineligible for such benefits.
Therefore, the likelihood of an investigation being launched into an R&D claim has escalated. HMRC retains the authority to launch an inquiry within 12 months from the filing date of a tax return, irrespective of whether a credit or refund has already been issued.
How to make an R&D Tax Relief claim
Typically, R&D Tax Relief claims are filed with HMRC at the end of the accounting period. However, companies have two years from the end of the accounting period to submit one.
For accounting periods beginning on or after 1 April 2023, check if you need to submit a claim notification form to notify HMRC in advance of your claim. You can find out what you need to provide here.
From 8 August 2023, you must also submit an additional information form to support your claim. You can find out more about this here.
The next stage is an initial assessment, which is undertaken to determine whether the proposed project meets all the relevant qualifications and eligibility criteria.
This is then followed by collecting all technical and financial information relating to the eligible projects.
Then there is the preparation of the claim documentation, which should include:
- How the project will create an advance in the field
- How the issue could not be solved by a professional in the field
- How the project faces some degree of uncertainty
- How the business attempted to overcome the uncertainty
Finally, a comprehensive review of the claim will need to be undertaken, and the claim pack submitted.
Top tips to achieve a successful claim
To make the process as stress-free as possible, here are some top tips for making that all-important R&D claim.
- Although you do not need to find a specialist, this is an area where significant value can be added to enhance the quality of your application.
- Ensure that there is a particular focus on the advances being made, the uncertainties faced, and a good breakdown of the qualifying expenses.
- Provide as many technical details as possible to ensure the claim is robust to stand up against close HMRC scrutiny.
- Prevent significant delays by submitting the correct qualifying costs.
- R&D tax credit claims can be made by businesses across a range of sectors, so it is prudent to review all aspects of business activity (such as project start and end dates, employee timesheets, and details of any subcontracted R&D or agency staff brought in to help) to take full advantage of R&D tax credits.
- Ensure that your Additional Information Form is completed comprehensively. Anu company that fails to complete this form fully will see its claim removed from its tax return.
Claims can be made up to two years after the end of the accounting period that the claim relates to. For claims covering more than 12 months, separate claims for each accounting period must be made.
However, businesses should aim to make an R&D Tax Relief claim early into their new financial year, as this allows the company to benefit from their claim much earlier.
How long does it take to receive R&D tax relief?
HMRC aims to deal with 95% of payable tax credit claims within 28 days of submission.
It is often a time-consuming and complicated task navigating the R&D tax incentives application process, which is why having a dedicated R&D incentives team to steer the business’ submission can pay for itself in tax relief.
How can we help?
We understand the complexities of R&D tax relief and are here to answer any questions you may have about it. Our experts can provide advice on how to make the most out of the scheme for your business. We offer a free consultation, so don’t hesitate to get in touch with the team rdtax@ifteam.co.uk
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