Overview
The Research and Development tax credit scheme was launched by the UK government in the year 2000, aiming at Small & Medium Enterprises (SMEs) followed by a separate scheme for larger companies in the year 2002. The schemes were designed to encourage scientific and technological innovation within the UK by enhancing tax relief, or providing cash credits, to businesses of all sizes that are involved in innovation. The value of these incentives and mechanisms varies depending on the size of the business, their relationships with customers and vendors, and the appropriate level of spend incurred.
WHAT IS R&D FOR TAX PURPOSES?
Whilst the core nature of R&D is common across countries, the specific eligibility requirements do vary between jurisdictions. In the UK, the R&D guidelines are set out by the Department of Science and Technology (formerly Business, Energy and Industrial Strategy or BEIS).
The hurdles for project activities to qualify as R&D for tax purposes, as defined in the guidelines, are in fact lower than most people expected. Research and Development (R&D) in this case applies to a broad range of industry sectors, as long as the project activities undertaken by the business meet both of the following criteria are met:
Read the full version of the meaning of Research and Development (R&D) for tax purposes: guidelines for more information.
TYPES OF R&D SCHEMES
There are different types of R&D credits schemes are available for companies, depending on the size of your business and if the project has been subcontracted to you.
For all types of schemes, a claim must be made within 2 years of the end of the accounting period. The following are some of the key R&D credit schemes in the UK.
SMALL AND MEDIUM SIZED ENTERPRISES (“SME”) SCHEME
- This scheme works on a “super-deduction” basis, which allows SMEs to deduct an extra 130% (in addition to the normal 100% deduction) of their R&D costs from their annual taxable profit. This therefore reduces the amount of tax the company needs to pay, with a tax-saving benefit of up to c.25%, i.e. for every £1 spent on R&D, the company can pay about 25p less tax after making the R&D claim. In the event of a loss-making situation, the company can claim a cash credit of up to 33% of the qualifying expenditure identified, meaning that for every £1 spent on R&D, the claimant can receive 33p of cash from the Government.
- From April 2023 onwards, however, the headline rates for the SME tax relief scheme are changing as announced in the Autumn Statement in November 2022. The changes in rates for the SME scheme mean that the net claim benefit will drop from a maximum of c.33% to in-between 8.6% - 27% depending on if the company is profitable or loss-making and whether it is R&D-intense (i.e. 40% of total project cost incurred in R&D). The key highlights include:
- The SME scheme will have the additional deduction reduced from 130% to 86%
- The SME credit rate is restored at 14.5% for R&D intense companies
- In order to claim under the SME regime, your business needs to be an SME with:
- Less than 500 staff AND
- Either a turnover of under €100m or a balance sheet total under €86m
- There are other requirements that need to be met so as to be able to claim under the SME scheme such as which funded the project activities etc.
- The R&D costs that can be included in an SME claim are limited to the following:
Staff costs- Externally Provided
Workers (EPWs) - Payments to
Subcontractors - Software and
consumables
- An SME cap has recently been introduced which applies to accounting periods started on or after 1 April 2021. This cap limits the R&D tax credits an SME can receive to £20,000 plus three times the total PAYE and NIC liability of the company for the year. Your SME claim will not be affect if you are claiming less than £20,000 of payable credits, or the following two part test is met:
- The claimant company’s employees are creating, preparing to create or actively managing IP; and
- The spend on connected party resources does not exceed 15% of the company’s qualifying R&D expenditure for an accounting period
- To find out if your business is eligible to make an SME claim, please contact us.
RESEARCH & DEVELOPMENT EXPENDITURE CREDITS (“RDEC”) Scheme
- The R&D tax credits scheme for large companies was launched in 2002. This scheme used to operate on the super-deduction basis until April 2013 when it was replaced by the RDEC scheme, which allows loss-making large companies to claim an “above-the-line” cash credit of 13% (12% prior to 1 April 2020) of their qualifying R&D spend. This credit is taxable at the normal Corporation Tax rate (19%), so the net cash benefit is worth c.11p for every £1 you spend on R&D project activities.
- From April 2023 onwards, the headline rate for the RDEC tax relief scheme will increase from 13% to 20%, as announced in the Autumn Statement in November 2022.The change in the headline rate for the RDEC scheme means that the net claim benefit will increase from c.10% to somewhere between 15%-16.2% depending on the profit/loss situation where different CT rates apply in the case of profit being over £250k.
- The benefit is shown “above-the-line”, meaning that it is visible as an income when calculating profit-before-tax in your accounts.
- The RDEC benefit can be used to offset against the company’s tax liability if your business is profitable, or to be surrendered for a cash credit if the company is loss-making. The amount of cash credit a large company can receive is limited to the company’s PAYE/NIC liabilities of the staff engaged in eligible R&D activities in the claim period.
- The R&D costs that can be included in an RDEC claim are limited to the following:
- Staff costs
- Externally Provided
Workers (or EPWs) - Payments to
qualifying bodies - Software and
consumables
- To find out if your business is eligible to make an RDEC claim, please contact us.
RESEARCH & DEVELOPMENT ALLOWANCES (“RDA”) Scheme
- Whilst the SME and RDEC tax credit schemes are only applicable to revenue expenditure expensed to your company’s profit and loss account, if your business incurs capital expenditure associated with R&D, you can benefit from the RDA scheme.
- RDA is a specific form of capital allowances that provides a timing benefit by allowing 100% of the costs to be tax deductible in the year of spend. This can significantly improve your company’s cash flow in comparison to other capital allowances which give tax relief over longer periods.
- This scheme is available for both SMEs and large companies. There are no restrictions on the types of costs that can be claimed under this scheme. Capital expenditure incurred, wholly or partially, for carrying out R&D or providing facilities for carrying out R&D, can be eligible.
- To find out more about the RDA scheme, please do contact us.
Our Service Offerings
We are here to help you smooth up the claim process by tailoring our approach to suit your needs. We offer the following services:
Fully outsourced claim process
To free up your time, we will handle the claim process from end-to-end. Specifically, we will:
- Assist you to identify all qualifying project activities and costs.
- Prepare your claims and documentations as per HMRC guidelines.
- Offer advisory support to mitigate potential risks of HMRC enquires.
- Provide end-to-end project management until you get your claim benefits.
Desktop review
If you already have the knowledge and resources to prepare the claim in-house and just want some quality assurance before submission, this service is for you. Under this offering, we will:
- Provide full guidance and templates to help you put your claim together.
- Review your claim documentation before submission
- Provide feedback on accuracy and quality of the claim.
Assisting you with your existing HMRC enquires
Dealing with HMRC for claim enquiries can often be very daunting and needs a certain level of experience to deal with. If you are having trouble responding to HMRC and need specialist advice, we have extensive experience in this area. For instance, we offer:
- End-to-end help with retrospective enquiries (included as part of fully out-sourced claims)
- Technical documentation with sufficient level of deep technical details for narratives in line with HMRC guidance
- Review of existing data and cost analysis for retrospective claims
Our Approach
We realise that time is gold for any business. Therefore, to minimise disruption to your day-to-day activities, we can provide full support in every single step of the claim process as illustrated below.
- We will work with the relevant data that are readily available in your systems
- We will undertake robust analysis of your data and business to calculate the appropriate values for consideration
- We will require 1 - 2 hours (subject to project size) with your technical professionals to assess eligibilities and review the claim documentation which we will prepare
- We will share the relevant claim documentation and workings for your review
- We will send the report to HMRC on your behalf
- We can support you with any help needed until you receive your claim
Souvik heads Innovation Incentives & Product operations in the UK. He is a versatile professional with a successful track record of over 10 years in the Innovation Incentives space and over 12 years overall in UK technology landscape with 360 degree innovation strategy. He has a background in Computer Science Engineering with MSc. Information Systems Management from the University of Sheffield. Souvik is an ex-Disruptive Technologies lead with 9 years of experience at Deloitte UK.
Souvik has led over 200 client engagements ranging from start-ups to FTSE 100 which includes some of the very big names in the industry, while successfully generating and securing over £1 Billion qualifying R&D expenditure. Souvik’s experience also includes managing the delivery of emerging AI and Digital solutions, product development and client strategy, specifically focusing on end-to-end lifecycle planning, commercials, launches and operations.
Carrie is a Tax & Finance Senior Manager in the UK specialising in Innovation Incentives with an excellent track record in delivering over 300 R&D Tax Credits claims in the UK. Carrie is an ex-Deloitte professional who was responsible for the end to end delivery of the R&D claims and managing the client relationship together with providing sales support. She has spent almost 10 years working with a range of clients from small start-ups to some of the largest companies. Carrie has a background in Life Science, where she completed her PhD in Pharmacology from UCL and held a postdoctoral research position for over 3 years at UCL, including working as a scientist at a pharmaceutical company for new drug discovery.
Steve is a seasoned Business Development Senior Manager with more than 18 successful years working in sport in various commercial and sponsorship positions for a Premier League football club. Steve moved into the finance sector with a successful track record and a wealth of skill within in the Research and Development (R&D) sector where he has successfully worked on claims from SMEs to those listed on the FTSE 250.