R&D frequently asked questions

SME Scheme

When your business is profit-making for an accounting period, it is liable to corporation tax based on the calculated taxable profit.

Once the qualifying research and development (R&D) expenditure has been calculated, it needs to be multiplied by 130% (for pre-1 April 2023 costs) or 86% (for costs relating to 1 April 2023 onwards); the resulting amount is utilised as a deduction in the computation and reduces the profits chargeable to corporation tax. The claim benefit is simply the difference between corporation tax liability before and after this deduction.

R&D tax relief can reduce your business’s corporation tax liability in two ways:

Full Reduction: If the calculated claim benefit is equal to or more than your corporation tax liability, it will completely eliminate your business’s liability. You won’t have to pay any corporation tax for that year.
Partial Reduction: If the claim benefit is less than your corporation tax liability, it will reduce the amount due to HMRC. You’ll still have a corporation tax liability, but it will be lower than what it would’ve without the R&D tax relief claim.
Now, if you’ve already paid your corporation tax to HMRC before you claim relief, there are a couple of possible scenarios:

Rebate: If the R&D tax relief lowers your corporation tax liability than the amount you’ve already paid, HMRC will refund the difference.
Reduction of future tax payments: In some cases, instead of a direct refund, HMRC may apply the difference to reduce your future tax payments.
Prior to 1 April 2023, many profit-making companies were liable to corporation tax at a flat rate of 19%. Recent changes made to corporation tax rates means that for companies with profits over £250,000, the main rate of 25% will apply. If your business is in the future liable to corporation tax at 25%, the tax benefit will be greater than if your corporation tax was calculated at 19%, let’s say.

RDEC Scheme

After identifying and calculating the qualifying R&D expenditure, this amount should be multiplied by the RDEC rate, which is 13% (for pre-1 April 2023 costs) or 20% (for costs relating to 1 April 2023 onwards).  The resulting figure is your Research and Development Expenditure Credit (RDEC), which represents a ‘taxable credit’.

The next step involves applying this taxable credit to your business’s corporation tax computation. First, this credit is used to reduce your corporation tax liability. If there’s any credit remaining after this offset, it may be funded to you as a cash payment.

If your business is claiming research and development (R&D) tax reliefs which involves receiving income from HMRC, you might be wondering if you need to change or update your previous financial statements. The simple answer is you don’t need to. The income received from R&D tax relief claims can be handled as adjustments from the past year in your next set of accounts.

Although you have the choice to change your previous financial statements for R&D tax credits, it’s not something that’s usually necessary. In fact, it’s pretty rare. The only time you would need to change your financial statements is when they don’t follow the rules in the Companies Act. Since the corporation tax in your financial statements is an estimate, any later changes to your business’s corporation tax as per the computation usually don’t require your accounts to be changed.

After you’ve made your first R&D tax relief claim, we can help you prepare your next claim to align with when your accountant is getting your accounts and corporation tax computation ready to file. This means if your business is profit-making, we can help lower your corporation tax liability before it’s due and give a cashflow boost. Contact Moore R&D today to enquire into how we can support your business.

If your business is making a loss, you can claim R&D tax relief in the UK, which can help your cashflow and drive further investment in R&D projects. The benefit is calculated differently across both schemes, which is based on the size of your company and the nature of the R&D activities.

Once the qualifying research and development (R&D) expenditure has been calculated, it needs to be multiplied by 130% (for pre-1 April 2023 costs) or 86% (for costs relating to 1 April 2023 onwards); the resulting amount is utilised as a deduction in the computation and further increases the tax-adjusted trading losses.

SME Scheme

If your SME is loss-making, you can either carry forward your losses or surrender your losses in exchange for payable R&D tax credits. The surrender rate is 14.5% for SMEs pre-1 April 2023, although 10% from 1 April 2023 onwards. You will notice that the surrender rates are lower than the corporation tax rates. The SME scheme was designed by HMRC so that if you opt to receive the tax benefit now rather than in the future, there is a compromise in the amount payable to your business.

The number of losses available to surrender is the lower of: the unrelieved trading losses and the enhanced expenditure (which is the qualifying R&D expenditure @ 230%). After all, you can’t surrender more losses than what you have available! If your business has made a small trading loss during an accounting period, you may want to carefully consider whether it is worthwhile carrying forward those losses.

Example:

So, if your business’s qualifying R&D expenditure for a pre-1 April 2023 accounting period is £100,000, the additional deduction in the computation would be £130,000 and the enhanced expenditure would be £230,000. The enhanced expenditure of £230,000, provided it is not lower than your business’s unrelieved trading losses, can be surrendered for a payable R&D tax credit at 14.5%, which would be £33,350.

RDEC Scheme

This credit is calculated at 13% of the qualifying R&D expenditure for expenditure incurred from 1 April 2020 up until the 31 March 2023. From 1 April 2023 the rate has increase from 13% to 20%.  The benefit is given as a ‘below the line’ credit, which can be used to settle corporation tax or be claimed as a payable R&D tax credit if the company is loss-making. It is worth noting that RDEC is a taxable credit.

Pre-1 April 2023 at 13%:

With the UK corporation tax rate of 19%, the net credit would amount to 10.53% of the qualifying R&D expenditure in most cases.

Post-1 April 2023 at 20%:

With the RDEC rate increasing to 20% and the UK corporation tax rate changes coming into effect, your business could be entitled to a net credit that amounts to 15% of the qualifying R&D expenditure.

The UK government’s research and development (R&D) tax relief schemes, such as the Research and Development Expenditure Credit (RDEC) and the Small and Medium Enterprises (SME) scheme, are available to businesses of various types and across all sectors, provided they undertake innovative projects that meet the criteria. The question “Can my type of business claim R&D tax relief?” is more about your business structure and the nature of your activities, rather than the industry you operate within.

To be eligible for R&D tax relief, must-haves must be ticked from a business structure standpoint. These are as follows:

• Your business must be a UK company subject to corporation tax.
• Your business must be trading as a going concern.
• Your business must not be in administration or liquidation.
• Your business must be undertaking qualifying R&D projects.
• Your business must have spent qualifying expenditure with respect to the R&D projects undertaken.

The first must-have – i.e., a UK company subject to corporation tax – means that businesses not subject to corporation tax generally cannot make an R&D tax relief claim. Consequently, sole traders are not eligible, and, in most cases, this also applies to limited liability partnerships (LLPs) unless certain requisites are met.

In relation to the nature of activities carried out by businesses, the key eligibility criteria for both schemes revolve around seeking to resolve scientific or technological uncertainties to deduce a scientific or technological advance. If your business is taking risks by trying to innovate in new or improved processes, materials, devices, products or services, your business could be eligible for R&D tax relief.

Here at Moore R&D, we specialise in identifying and maximising R&D tax relief for UK limited companies, helping them to benefit from these valuable government incentives. Contact one of our experts today to determine if your business qualifies. Innovation could lead to significant tax relief – do not miss out.

It is important that companies make a research and development (R&D) tax relief claim under the correct scheme. However, navigating the world of R&D tax reliefs can be complex, especially when it comes to determining which scheme – the Small and Medium Enterprises (SME) scheme or the Research and Development Expenditure Credit (RDEC) – is the most suitable for your business. The answer hinges on your business’s size and structure and the nature of your R&D activities.

There are two scenarios where companies are not defined as SMEs through size, instead qualifying as a large company (LC). These are as follows:

Scenario 1:

More than 500 FTE staff

AND:

Turnover in excess of €100 million

OR:

Gross balance sheet assets in excess of €86 million

Scenario 2:

Fewer than 500 FTE staff

AND:

Turnover in excess of €100 million

AND:

Gross balance sheet assets in excess of €86 million

For standalone companies, the sizing tests are often straightforward to work through. However, careful consideration needs to be taken for companies that are part of a group – specifically those with partner enterprises and linked enterprises. At Moore R&D, we have a strong understanding of how to analyse group structures and ensure that your business is claiming under the correct scheme.

There are also scenarios which require companies that are technically an SME in size to make a claim, in part or in full, under the RDEC scheme.

As we have already mentioned, the size of your business is not the only determinant. The nature of your R&D activities also plays a crucial role. Both schemes require your business to be working on projects that seek to achieve an advance in science or technology. You must be resolving scientific or technological uncertainties; this means your business is not merely developing new processes, materials, devices, products or services, or appreciably improving existing ones, but your business is genuinely innovating in a field of science or technology.

The nuances of these schemes can be challenging to navigate alone. Whether you are an SME considering applying for R&D tax relief, or a larger company or subcontractor looking at the RDEC scheme, our experts can guide you through the process to ensure your entitlement has been maximised. Contact us today to find out which R&D tax relief scheme your business qualifies for.

For many UK businesses that undertake qualifying research and development (R&D) projects, maintaining sufficient funds to progress projects towards deployment and commercialisation is crucial – receiving income from successful grant applications is one way to do this. Companies have often assumed that they cannot receive both upfront grant income and retrospective payable R&D tax credits for the same accounting period. However, this is a common misinterpretation we have seen when helping our clients.

While businesses can receive grant income and make an R&D tax relief claim for the same accounting period, diligence is needed to ensure regulations are complied with. An R&D tax relief claim can be affected by the type of grant and the wording stated within the contract.

Many types of grants, which include the UK R&D tax relief’s Small and Medium Enterprises (SME) scheme and Innovate UK Smart Grants, are regarded as notified State Aid in accordance with European Union rules; these rules were introduced to ensure that companies’ receipt of notified State Aid does not lead to unfair commercial advantages amid the ever-competitive market.

Contrary to the SME scheme, the Research and Development Expenditure Credit (RDEC) scheme is not regarded to be notified State Aid; what this means is that notified State Aid grant income and R&D tax relief claims can coexist.

To summarise and answer the question to which this topic relates, the receipt of grant income for R&D purposes means that a claim generally cannot be made under the SME scheme; however, a claim can be made under the RDEC scheme.

Understanding how your business’s grant income impacts your R&D tax relief claim is particularly complex to navigate. As consultants who specialise in providing R&D tax relief advice and have served clients who have been awarded Innovate UK Smart Grants, Moore R&D can offer a helping hand. In addition, if you are interested in applying for grants to help fund a planned R&D project, we can introduce you to a highly experienced team with specialist skills in grant writing whom we work closely with. Contact us today through our designated Moore R&D mailbox to find out more information.

Understanding whether your business can claim research and development (R&D) tax relief for a subcontracted project depends on your company’s size and the nature of the subcontracting relationship. The UK government offers two schemes: the Small and Medium Enterprises (SME) scheme and the Research and Development Expenditure Credit (RDEC) scheme. The legislation surrounding R&D tax relief claims (CTA 2009 Part 3 Chapter 6A and Part 13) has been written with something important in mind – where a subcontracting relationship exists, only one business should be able to claim R&D tax relief on a specific project that has been undertaken.

Let’s consider various scenarios, which are as follows:

• If your business is an SME subcontracted by another SME to work on an R&D project, then you are unable to make a claim under the SME scheme. Furthermore, your business will also be unable to claim under the RDEC scheme.
• If your business is an SME subcontracted by a Large Company (LC) to work on an R&D project, you can make a claim under the RDEC scheme, regardless of who bears the risk and owns the rights to the R&D results. The LC cannot claim R&D tax relief for the payments made to your business.
• Now, if your business is a LC subcontracted by an SME to work on an R&D project, the SME can claim under the SME scheme if it is the entity that bears the risk and owns the rights to the R&D results. However, your LC cannot claim R&D tax relief for your subcontracted work.
• Lastly, if your business is a LC subcontracted by another LC, you can claim the relief under the RDEC scheme as normal.

These scenarios show that claiming R&D tax relief on subcontracted work involves understanding the nuances of both your business and the specific subcontracting relationship.

At Moore R&D, we have a wealth of experience helping companies navigate these complexities. We can help you identify which of the projects that are being considered for R&D tax relief are eligible, depending on whether a claim is being made under the SME or RDEC scheme.

If your business is part of a subcontracting relationship, and you are carrying out innovative work that seeks to advance a field of science or technology through the resolution of scientific or technological uncertainties, contact us today to explore your R&D tax relief options.

There are several scenarios where a claimant would be required to divide their qualifying expenditure for a given accounting period into two schemes: Small and Medium Enterprise (SME) and Research and Development Expenditure Credit (RDEC). It is not as uncommon as you may think, so it is always worth seeking advice if in any doubt.

Our team at Moore R&D has significant experience in dealing with hybrid claims, so contact us today if you want clarity.

Imagine your business has yielded so much success and growth that it can no longer be classified as a Small and Medium Enterprise (SME). Let’s say that as of 1 July 2022, your business had a headcount of 708 employees, and the gross balance sheet assets just about exceeded €86 million; as such, it now technically meets the requirements of a Large Company (LC).

Let’s also say that your business’s accounting period ends on 31 December of each year, meaning the 2022 accounting period ran from 1 January 2022 to 31 December 2022. If you had limited experience or knowledge of R&D tax relief claims, you would expect that your business would need to claim under the Research and Development Expenditure Credit (RDEC) scheme from the accounting period ending 31 December 2023 onwards. However, this is not correct in many cases. A ‘period of grace’ applies where the transition arrangement does not occur until the position is repeated for a second consecutive year.

This means that for the example given, your business will continue to claim under the SME scheme for the accounting period ending 31 December 2023 but will need to claim under the RDEC scheme for the accounting period ending 31 December 2024, and any other future claims made beyond this point. This principle also applies where a LC transitions to an SME.

It should be noted that there are several exceptions in which the transition arrangements do not honour a period of grace. Coming to a conclusion as to whether your business is a SME or LC, and whether your business’s transition arrangement requires a position to be repeated for two successive years, is complex to efficiently and correctly navigate without any specialist guidance. Moore R&D has a team of experts with a robust understanding of this principle and are more than happy to offer support; all you need to do is contact us, and we will allay any uncertainty.

Before introducing the research and development (R&D) tax relief regime, the UK’s spending on R&D (which was measured as a proportion of Gross Domestic Product) fell short compared to that of many other countries.

To create more jobs, improve productivity, and increase market competition, the UK Government introduced reliefs for companies incurring revenue expenditure on certain types of costs that are directly or indirectly connected to R&D.

According to the statistics that HMRC published in September 2022, which relate to the 2020-21 tax year, the following sectors made up 70% of the total amount claimed: Information and Communication, Manufacturing, and Professional, Scientific and Technical. However, it is not to say that your business is unlikely to qualify if it does not fall within these sectors. Each business needs to assess their eligibility based on the guidelines on the definition of R&D for tax purposes, which can be found in CIRD81900 or CIRD81910.

At Moore R&D, we have vast experience when it comes to assessing whether businesses qualify for relief. We offer a free scoping call to discuss whether any potential R&D projects are eligible, so, contact us if you would like to arrange this.

R&D cannot exist with a scientific or technological advance but no scientific or technological uncertainty, and vice versa. R&D takes place when a project seeks an advance in a field of science or technology through the resolution of scientific or technological uncertainty. The use of the word ‘seeks’ should be highlighted and means that the ability to claim for a project does not rely on success.

If a project sought to bring a company’s knowledge and capability in line with a field of science or technology’s knowledge and capability that was already readily available, it would not qualify for R&D tax relief.

Scientific or technological advance

An advance is always measured against the knowledge and capability that was readily available in the public realm in relation to that specific field of science or technology; this is commonly referred to as the “baseline”. The baseline can be imagined as a horizontal line which is defined as the existing knowledge and capability. If a qualifying project proves to be successful, resulting in new knowledge and advanced capabilities in a field of science or technology, then the baseline has effectively been raised for that field of science or technology in its entirety.

In seeking to derive new knowledge in a field of science or technology, this would need to occur through the development or improvement of a process, material, device, product, or service.

Scientific or technological uncertainty

Three main types of scientific or technological uncertainty can be encountered when a qualifying project is being worked on: scientific or technological feasibility, practical application, or system uncertainty.

There are two critical questions that you should ask yourself when assessing whether a project your business has worked on qualifies for R&D tax relief. These are:

1. Is the new knowledge that is being sought readily available in the public realm; and
2. Is the new knowledge that is being sought readily deducible for competent professionals working in the field of science or technology?

If the answers to both these questions are ‘no’, then these are strong indicators of R&D in terms of scientific or technological uncertainty.

R&D is often necessary because a technical problem has been discovered. If the existing knowledge in a field of science or technology means that certain methods or approaches are applied, and none of these methods or approaches resolve the technical problem, then scientific or technological uncertainty has occurred. To resolve the scientific or technological uncertainty, new methods or approaches, which would not traditionally be taken for the technical problem that has been identified, would need to be trialled in an experimental manner to deduce the new knowledge sought, and in turn the advanced capability.

How we can help

With HMRC scrutinising more claims now than ever before, it is important that claims are accurately made from the get-go; this can be achieved with Moore R&D’s specialist guidance and advice. Navigating the comprehensive guidelines on the meaning of R&D for tax purposes can be challenging for your business, so that is where we can come in and share our knowledge in an easily digestible way.

It is essential that potential research and development (R&D) projects are assessed correctly so that all claims submitted to HMRC by your business are accurate. A common misinterpretation is that because a project involves the development of a bespoke process, material, device, product, or service, it qualifies for relief; simply put, this is not always the case.

A bespoke process, material, device, product, or service will only qualify for relief if it necessitates an advancement in overall knowledge and capability in a field of science or technology and in order to do so, requires the resolution of scientific or technological uncertainty.

This means that projects which can be described as innovative do not necessarily qualify for relief; each project requires careful assessment, which we have the resource to do at Moore R&D.

Once the qualifying expenditure has been calculated and the technical claim report has been prepared, your business is ready to submit a research and development (R&D) tax relief claim to HMRC via the corporation tax return. Up to and including 7 August 2023, claims were filed to HMRC by entering the qualifying expenditure details and attaching the technical claim report to the corporation tax return. These steps alone would suffice.

However, noteworthy changes are coming into effect from 8 August 2023, so the steps mentioned previously no longer suffice. For any claims made from this date onwards, an Additional Information form must be completed and submitted to HMRC before the corporation tax return is filed. If the Additional Information form comes after corporation tax return filing, HMRC will write to your business and confirm they have removed your R&D tax relief claim from the corporation tax return.

Moore R&D can act on behalf of your business as an agent, completing and submitting the Additional Information form and leaving you to focus on the day-to-day activities of your business. We can also advise how your business can streamline processes to ensure that the Additional Information form is filled out as seamlessly as possible. Get in touch with any queries you may have regarding how to submit R&D tax relief claims successfully.

The time it takes for any payable research and development (R&D) tax credit or refund to be paid out by HMRC can depend on a range of factors. Often these factors will be outside of the control of the claimant – such as certain times of the year when a lot of claims are submitted simultaneously, when HMRC are having operational issues, or when there are significant rule changes.

Furthermore, HMRC may sometimes ask for further evidence to support a claim. When this occurs, through the opening of an aspect enquiry, the payment of a claim will be significantly delayed until such a point whereby HMRC is satisfied that the claim is legitimate and correct.

However, under usual circumstances, the “rule of thumb” might be that a well-prepared claim is paid out 4 to 10 weeks after it is submitted to HMRC.

It certainly is possible that HMRC will “net” any payable research and development (R&D) tax credit against another liability owed by the company to HMRC – for example, a PAYE liability that was outstanding at the time. In fact, under Research and Development Expenditure Credit (RDEC), this process is even laid out in legislation.

A compliance check, or aspect enquiry, is where HMRC uses the powers at its disposal to request further evidence in order to confirm that the claim is legitimate and correct. If your claim is well-prepared, then there should be no reason to panic – a compliance check does not necessarily mean anything wrong with your claim.

However, being proactive in responding to any such letter is important. Usually, HMRC will provide around 30 days for you to respond to the questions laid out within their letter. If you do not feel you have been given sufficient time to answer HMRC’s questions effectively, then it is important to let the case worker as soon as possible – they will usually be amenable to an extension.

Furthermore, seeking high-quality professional advice in these circumstances is always best. This may be from your accountant, tax advisor, or R&D agent. Moore R&D has a specialist team that can support any company in providing the information requested by HMRC in relation to the claim.

Providing robust documentation that details the research and development (R&D) activities in an easily digestible but comprehensive manner will reduce the risk of a compliance check. The general principle is to try to answer any questions HMRC may ask within the report – before they get the chance to ask them.

A good R&D adviser will be able to recognise the elements of a claim that HMRC may be curious about and will ensure that additional detail is provided.

Whether you have prepared your claim yourself, or by using an agent, Moore R&D’s experts can provide you a free risk assessment of your claim should you have any concerns.

Generally, while a compliance check is ongoing, HMRC will hold back the payment of a Research and Development (R&D) tax credit. However, in some extremely rare circumstances where HMRC has partially agreed to a claim being paid, a decision may be made to pay out some of the credit. It is worth noting, however, that if HMRC has paid out in respect of a claim prior to the opening of an enquiry, they will claw back monies already paid out should any part of the claim be deemed as non-qualifying.

There are a few key timing considerations for submitting an R&D tax credit claim after your business’s accounting period has ended:

• The R&D claim can only be submitted after your company accounts have been prepared and finalised. Subsequently, you can make your claim for R&D tax relief in your Corporation Tax return or amended return.
• Mandatory additional information required to make an R&D claim: After 8 August 2023, HMRC will require R&D claimants to fill an ‘Additional information form’ (AIF). This form must be completed and submitted to HMRC before your company’s Corporation Tax return for the period is submitted to HMRC. Failure to do so will nullify the claim.
• How far back can I claim? Claims can technically be submitted up to 2 accounting periods after the period end date per HMRC guidelines. For example, if your accounting period ended on 31 December 2021, you would have until 31 December 2023 to submit an R&D claim.
• Do I need to notify HMRC about an R&D tax claim in advance? Yes – If your company is a first-time claimant or has not claimed R&D tax relief in the past three years, and your accounting period starts after 1 April 2023, you must notify HMRC of your intention to make a claim within six months of that period ending.

Changing accounting periods:

• Extending your R&D claim period: The accounting period can be extended beyond the normal 12-month accounting period up to 18 months. This can allow more qualifying R&D expenditure to be included within the accounting period.
• Shortening your R&D claim period: The accounting period can be shortened to less than 12 months. This can allow expenditure to be claimed earlier, which improves cash flow.
• HMRC must approve extended and shortened periods in advance.

Advanced assurance for SMEs:

• Advance Assurance is a scheme provided by HMRC aimed at supporting SMEs applying for R&D tax relief. This scheme is voluntary and designed to facilitate the processing of R&D claims without additional HMRC enquiry.
• According to HMRC guidelines, obtaining Advance Assurance acts as a validation that claims will be accepted, provided they align with what was discussed and agreed upon in the application. The Advance Assurance applies to a company’s first three R&D tax relief claims.
• Who can apply? All SMEs are eligible to apply for Advance Assurance and as long as the company is not part of a group and none of the companies linked to the claimant entity have previously made a claim.

The amount of detail you need to provide in your technical claim report is based on the total number of R&D projects your company has undertaken. Here are the guidelines:

• For 1 to 3 projects, full project details that match total qualifying expenditure.
• For 4 to 10 projects, full project details that reflect at least 50% of the total qualifying expenditure – a minimum of 3 projects is required.
• For 11 or more projects, full project details that reflect at least 50% of the total expenditure, with a minimum of 3 projects described — if your qualifying expenditure is split across multiple smaller projects, the 10 largest ones are required.

HMRC requires in-depth technical justifications of qualifying R&D projects, including:

• What the main field of science or technology your project relates to.
• What was the baseline level of science and technology at the start of your project.
• What advance in that scientific or technological knowledge your company aimed to achieve.
• What were the scientific or technological uncertainties faced.
• How your project sought to overcome these uncertainties.

The above compliance questions require in-depth answers to help build a robust claim. At Moore R&D, our subject matter experts can assist you on the complexity and depth of answers needed to form your technical claim report.

A breakdown of the qualifying R&D expenditure is needed to clearly show the trail from technical R&D activities to related expenditure and the resulting R&D benefit calculation. The technical and financial aspects should neatly align.

A summary of total expenditure by eligible cost category must be provided to HMRC. For accounting periods beginning on or after 1 April 2023, HMRC requires a further breakdown of some eligible cost categories by qualifying project.

In short, yes – as long as you are classified as an SME.

The benefits of the RDEC scheme can be considered for SMEs who receive grant funding, e.g. a project specific grant application being submitted to a state aid body (such as Innovate UK).

If the project is an eligible R&D project, the project must be claimed under the RDEC scheme. This applies only to the project that you received funding for. For example, if you have 3 eligible projects and 1 of these projects received (state) grant funding, you can claim the other 2 projects under the SME scheme.

You can only make a claim for certain types of expenses under the UK’s research and development (R&D) schemes. The general principle is that where an expense meets the definition of one of the following cost categories, is incurred in relation to relevant R&D, and is allowable as a deduction in computing the profit of the trade to which the R&D relates, then it will likely qualify for relief.

• Staffing costs
• Externally provided workers
• Subcontracted R&D
• Consumables
• Software
• Payments to the subjects of clinical trials

There are some subtle but important differences between the Small and Medium Enterprise (SME) and Research and Development Expenditure Credit (RDEC) schemes when it comes to qualifying cost categories. In particular, the RDEC scheme will only allow subcontracted R&D to be claimed under some very specific (and somewhat rare) circumstances.

Capital expenditure generally will generally not qualify under RDEC or the SME scheme, with the exception of expenses that are not of a capital nature that have been capitalised as an intangible trade asset. There is, however, an R&D Capital Allowances scheme for R&D related capital expenditure.

For accounting periods starting on or after 1 April 2023, cloud computing (including storage) and data licence costs will be new types of expenses that can be considered for relief.

Research and development (R&D) activities are those that collectively serve to resolve scientific or technological uncertainties associated with achieving an advance. Therefore, R&D requires the activity of “people” by its very nature. As such, staffing costs are one of the commonly claimed expenses under the R&D schemes.

Staffing costs refer to the payroll-related expenses associated with employees or directors directly engaged in R&D projects (including qualifying indirect activities known as ‘QIAs’). This includes not only their gross salaries but also employer National Insurance contributions, employer pension contributions, and even certain employer reimbursed expenses.

Most employees or directors will have multifaceted roles, which may include both R&D activities and other non-R&D responsibilities. As such, an appropriate apportionment will need to be made to distinguish between qualifying and non-qualifying activities. Careful record-keeping and documentation are essential in this process to demonstrate how employees’ and directors’ activities directly relate to qualifying R&D projects.

Even for qualifying R&D staffing costs, it is generally advisable to distinguish between direct activities and QIAs. A QIA can generally be described as an activity that indirectly supports the R&D to occur without directly contributing to the resolution of scientific or technological uncertainty.

It should also be noted that where a director of a company is also a shareholder and dividends were issued to that director, the dividend income cannot be included for relief.

Under the UK’s research and development (R&D) tax relief schemes, businesses can claim not only direct costs incurred by their own staff, but also certain external or third-party costs directly related to qualifying R&D projects. These costs can significantly contribute to a company’s overall R&D expenditure and potentially lead to substantial tax benefits.

The eligible external or third-party costs that can be claimed typically include payments made to subcontractors and payments for Externally Provided Workers (EPWs). Subcontractor costs are claimable when a company hires external parties to perform R&D activities on their behalf. Similarly, payments for EPWs, which are individuals engaged through agencies or other intermediaries, can also be claimed as part of the R&D expenditure.

In addition to subcontractor and EPW costs, other qualifying external expenses include fees paid for research conducted by universities, scientific institutions, or research organisations on behalf of the claiming company.

Generally, subcontracted R&D activities can only be claimed under the Small and Medium Enterprise (SME) scheme. However, in certain specific circumstances, these can be claimed under Research and Development Expenditure Credit (RDEC); for instance, when an individual, a partnership of individuals, a qualifying body, or a scientific research organisation is engaged to carry out the R&D.

The amount that can be included for relief depends on whether any of the subcontractors or EPWs are connected to your business. At Moore R&D, we can help maximise your claim for relief by assessing the relationship between your business and third parties.

Consumable costs that are directly used or transformed during a qualifying research and development (R&D) project can be claimed. Generally, these costs will include expenses for materials, components, and other consumables that are essential for the R&D process. This may encompass a wide range of items, such as chemicals, materials for use in prototypes, test tubes, and even some utilities such as water, electricity or gas.

To be eligible for relief, the consumable costs must be directly attributable to the R&D activities and align with the project’s objective of achieving advancements in a field of science or technology.

However, consumable costs incurred in the development of a prototype which the company sells, or intends to sell, to a third-party are excluded. This means that a company will generally be unable to claim consumables used in a “first-of-class” prototype that is sold to a customer.

The cost of computer software or software licences utilised for research and development (R&D) purposes can generally be claimed. However, it is important to differentiate between software costs which would have been incurred irrespective of whether R&D took place – for example, Microsoft Office. The types of software costs that often qualify include CAD licences, R&D project management software, Finite-Element Analysis (FEA) tools, and DevOp tools.

Where software is used for both qualifying R&D and other purposes – for example, a CAD licence that is used in R&D but also for non-R&D product designs- an appropriate apportionment will need to be made to differentiate between the two.

Historically, cloud computing costs have not qualified under the research and development (R&D) schemes, as they do not meet the definition of a “software cost”. This has previously meant that companies have been unable to claim for R&D expenses incurred on cloud service providers such as AWS or GCP.

Fortunately, the rules have been modernised and changed for accounting periods that begin on or after 1 April 2023, allowing these costs to finally be included in R&D claims. Similarly, the costs of data sets purchased for the purpose of undertaking R&D also now qualify.

It is extremely important that any company intending to make a research and development (R&D) tax relief claim considers keeping detailed records. However, keeping timesheets or other time management records is not always possible, accurate or appropriate.

HMRC generally accepts that a first-time claimant may not have kept records specifically for the purpose of claiming R&D tax relief. In these cases, it is important to dig out any records that were kept should HMRC ask for proof. These records may include emails and other internal communications that demonstrate the activities and time spent by persons on projects, release notes, or product roadmaps.

For companies already familiar with claiming R&D tax relief, it is well worth spending some time devising a process that allows detailed records to be continuously collected.

This SME R&D Tax Relief Scheme substantially uplifts 130% on qualifying R&D costs. This means that for every £100 you spend on eligible R&D activities, the government will allow you to deduct £230 from your taxable profits when calculating your corporation tax. This includes the original £100 which would be a normal business expense, and an additional £130 as part of the R&D relief.

What if your company is making a loss? The government has you covered there too. Instead of carrying the loss forward or backwards as normal, you can opt to ‘surrender’ the loss for a payable tax credit. This tax credit is worth up to 14.5% of the surrendered loss. So, if you’ve made a loss for the year, you can still gain financial benefit from your investment in R&D.

The Research and Development Expenditure Credit (RDEC) scheme is a UK government initiative aimed to stimulate private sector investment in research and development. The RDEC scheme is mainly used by large companies, but it can also be accessed by some small and medium-sized enterprises (SMEs) under certain circumstances.

Previously, the RDEC scheme offered a payable tax credit at a rate of 13% on qualifying R&D expenditure. This tax credit is given ‘above the line’ in the company’s profit and loss account, effectively lowering the company’s overheads. However, this has recently been increased to 20% – providing even more incentive for innovative businesses.

Rate changes in R&D tax relief rates came into effect on 1 April 2023. The Research and Development Expenditure Credit (RDEC) rate increased from 13% to 20% for large companies. However, small to medium-sized enterprises (SMEs) unfortunately actually experience a decrease in their additional deduction from 130% to 86% and a general decrease in the SME credit rate from 14.5% to 10%.

SME Scheme

Dates:
Up to 31 March 2023
From 1 April 2023

Profitable:
130% uplift = 24.7% net tax benefit
86% uplift = up to 21.5% net tax benefit

Loss-making:
33.4% credit
18.6% credit
27.0% credit

RDEC (Large company) Scheme

Dates:
Up to 31 March 2023
From 1 April 2023

Profitable:
RDEC at 13% = 10.5% after tax
RDEC at 20% = 15% after tax

Loss-making:
10.5% credit
15% credit

There are a number of recent changes to the R&D tax relief legislation. This includes the following:

Restricting Overseas R&D Expenditure

Starting 1 April 2024, expenses related to subcontracted R&D and externally provided workers (EPWs) involved in R&D projects outside the UK will no longer be eligible for UK R&D tax relief. To qualify, these expenses must either be attributed to R&D performed in the UK or meet the criteria for qualifying overseas expenditure.

In addition, payments for EPWs must be subject to PAYE and national insurance contributions to qualify, unless deemed as qualifying overseas expenditure.

Criteria for Qualifying Overseas Expenditure

For R&D expenses outside the UK to be classified as qualifying overseas expenditure, they must meet three criteria:

• Necessary conditions for R&D aren’t present in the UK.
• Conditions exist in the location where R&D is conducted.
• It would be unreasonable to recreate these conditions in the UK.

These conditions may be geographical, environmental, or social and may include legal or regulatory requirements.

For instance, a UK company conducting clinical trials overseas will not be eligible for R&D tax relief from April 2024, unless legal or regulatory requirements necessitate the trials’ location.

Inclusion of software and technology costs

The new legislation recognizes costs for data licences and cloud computing services as qualifying expenditure, as long as they contribute directly to resolving scientific or technological uncertainty. Furthermore, costs for materials sourced overseas can still qualify if the R&D work is done in the UK.

Enhanced vompliance measures

To enhance compliance and curb potential misuse of the R&D tax credit system, HM Revenue & Customs (HMRC) is implementing several important changes:

• From 8 August 2023, all claims must be digitally submitted along with additional information on a new digital form. This form requires project and expenditure details in a specific format, with a necessary number of projects and proportion of expenditure clearly described for the claim to be valid.
• New entrants or companies that have not claimed in the past three years with accounting periods starting on or after 1 April 2023 must notify HMRC of their intention to make a claim. This pre-notification must occur within six months of the end of the relevant period.
• Every claim must be endorsed by a named senior officer of the business. In addition, any third-party agents engaged in advising on the claim must also be named.

These changes highlight the importance of understanding the evolving landscape of R&D tax incentives. Companies should familiarise themselves with the new regulations to ensure successful R&D tax credit applications and maximise potential benefits.