R&D tax credits: Is your business eligible to claim this?

Research and development tax credits have been around since 2000, aimed at encouraging innovation in UK businesses. 

They allow organisations to cut their tax bill or claim a cash credit for developing new products, processes, or services. And while they're most popular and widely used by larger businesses, smaller firms that satisfy the requirements are also eligible. The sums involved can be between £15 and £27 for every £100 spent on R&D (research and development).

However, recent statistics from HMRC show that there's been a drop in the number of claims from small and medium-sized businesses (SMEs). While claims from larger firms through the Research and Development Expenditure Credit (RDEC) scheme rose by 36 per cent to £4.41 billion last year, tax relief claimed through the SME scheme fell by 29 per cent to just £3.15 billion.

“The decrease, seen locally and across all the regions, is a crying shame because this kind of funding pays the people that help local businesses develop new and exciting technologies, which in turn grow the regional and wider economy," points out Heather Williams, a tax partner with UK top 10 accountancy and advisory firm Azets.

“Innovation costs considerable money – and a lot of innovation wouldn’t happen without taxpayer support because loss-making companies wouldn’t risk bankrolling further financial hits and profitable ones may fear being dragged into the red without recourse to public money to offset R&D outlay."

The latest figures are the first since changes to the system, scrapping a dedicated scheme for small businesses and rolling it into the RDEC scheme. These changes mean that, for expenditure incurred from 1 April 2023, there's now an 86 per cent enhancement to qualifying R&D expenditure for SMEs, and a credit rate of 10 per cent on losses surrendered. 

This is down from the 130 per cent enhancement rate and 14.5 per cent credit rate that were previously available – although companies spending more than 30 per cent of their costs on qualifying R&D will still benefit from the enhanced rates. 

Compliance requirements, meanwhile, have been tightened up, with more information needed than before.

And Azets believe that the decline in claims is down to this reduction in the benefit for SMEs and changes to compliance rules, along with the relatively high time and cost investment required to make a claim.

On behalf of the Chancellor, the then-Exchequer Secretary to the Treasury, James Murray MP, told Azets that the government is committed to periodically evaluating the R&D reliefs to make sure they're as effective as possible and that they're underpinned by a credible, up-to-date evidence base.

“Merging the SME and RDEC schemes has simplified the system as there is now a single set of qualifying rules for the vast majority of R&D claimants," he said. 

"The enhanced support for R&D-intensive SMEs shares many of the merged scheme's rules, albeit with a different rate mechanism. The government will continue to consider longer term simplifications and improvements to the effectiveness of the reliefs.”

To claim R&D tax relief for SMEs, your company must have fewer than 500 staff, a turnover of under €100 million, or a balance sheet total under €86 million, with an accounting period beginning before 1 April 2024. You'll need to be a UK limited company subject to corporation tax, meaning that sole traders, partnerships, and charities can’t claim.

You’ll also be unable to claim if your project is in the arts, humanities, or social sciences, including economics. Nor will you be eligible if you’ve received R&D relief, vaccines research relief, or both, adding up to more than 7.5 million. The same applies if you've received any other state aid for the project, or if it's subsidised in some other way, for example by a grant – although you may be able to claim on any part that isn't subsidised. You also can't claim for work subcontracted to you.
 
And the application process is quite time-consuming. You'll first need to check whether your project actually counts as R&D, and which of your project costs will qualify. These might encompass staff costs – including salaries, employer’s NIC and pension contributions; subcontractor and freelancer fees; software, cloud computing, and data licences, plus consumables such as heat, light, and power used during the R&D process.

If you’re a small or medium enterprise and you haven't claimed before, you may be able to use the advance assurance scheme to confirm if your project is eligible. You'll also need to tell HMRC that you want to apply for R&D relief and calculate how much you can claim. Your claim should be submitted as part of your company tax return.

But while all this may sound daunting, there's detailed advice from HMRC on what you need to do here, while hiring a tax expert to help will smooth your path.

And, says Williams, "Successful innovation can generate new revenues for businesses and create new taxes which more than cover what was put in by the taxpayer. Companies with genuine claims should not be put off."

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