UK R&D tax credits, launched in 2000, form a crucial part of the UK government’s policy to reward innovation in business by reducing the actual cost of investment in improving products and processes. According to HMRC, the average R&D claim for an SME is in excess of £50,000 and in excess of £600,000 for large companies.

In the latest autumn budget delivered by the chancellor Rishi Sunak, there is a huge emphasis on refocusing support towards innovation in the UK. Government spending on R&D in 2021 to 2022 is £14.9 billion – its highest level in four decades.

Under current rules, overseas R&D costs recharged to a UK claimant company qualify for relief. However, from April 2023, R&D tax relief will be restricted to activities undertaken in the UK. Overseas costs qualifying for tax credits will no longer be eligible. The idea is that it will encourage businesses to perform their R&D in the UK, creating a circle of increased spending, investment and job creation.

This is a good opportunity for businesses to move some or all of their R&D activity to suppliers in the UK. The UK government remains committed to reaching its target of 2.4% of GDP being spent on R&D across the UK economy by 2027. It has just announced the largest ever R&D budget, worth £39.8 billion, which has been allocated across the Department for Business, Energy & Industrial Strategy’s partner organisations. This reinforces the government’s commitment to putting R&D at the heart of plans to build back better from the pandemic.

There are two different schemes available: one for SMEs and one for larger companies (RDEC – R&D Expenditure Credit). Together, they form one of the largest single government funding mechanisms available for businesses in the UK.

Organisations with a global turnover exceeding €100 million or balance sheet value exceeding €86 million and over 500 employees can claim under the RDEC company scheme which is worth 13% of qualifying R&D expenditure. The credit is taxable at the normal corporation tax (19%) rate which effectively means the benefit is worth 11p for every £1 spent on qualifying R&D.

What business benefits does the RDEC scheme deliver?

• Loss-making large companies able to realise an immediate cash benefit.
• R&D teams able to recognise the value of the cash incentive in their budgets.
• Cost savings on future projects can be planned in advance.
• Relief under the SME scheme is not available for expenditure that is subsidised. However, there is no barrier to claiming for subsidised expenditure under RDEC. Thus, SMEs ineligible for the SME R&D scheme due to grants or subsidies can also claim via the RDEC scheme.

Does your business qualify?

• Are you a UK-registered company or subsidiary of an Indian company that is subject to UK corporation tax?
• Did you encounter technological challenges in the work conducted and was there uncertainty about the outcome from the start?
• Did you carry financial risks for a failed project?

If you answered ‘yes’ to each of the above, it is likely you are eligible to claim.

Please contact our India Group Partner Ian Matthews if you would like to discuss – IMatthews@mks.co.uk

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