What is R&D Tax Relief?
Research & Development (R&D) tax relief was introduced in 2000 in order to incentivise companies to undertake innovation and technological advances in the UK.
R&D tax relief is available where a company aims to achieve an advance via the resolution of scientific or technological uncertainty.
Although R&D tax relief has been around for over 20 years it is often overlooked; With HMRC placing claims under increasing scrutiny, it is paramount that full professional advice is established before any documents are filed.
R&D Tax Relief - Recent Changes to the Scheme
The R&D tax relief scheme has gone through significant change in recent years. Up until 31st March 2024 there were two schemes in respect of R&D tax relief being the ‘SME scheme’ and the ‘RDEC scheme’. However, on 1st April 2024, the SME and RDEC Schemes were merged and replaced with a single scheme called the ‘merged scheme’. However, a new scheme for R&D intensive SME’s has been added so in effect there will still be two schemes going forwards as follows.
- The Merged R&D scheme; and
- The R&D intensive regime for loss making SME
Merged R&D Scheme
For accounting periods beginning on or after 1 April 2024, all companies who are not R&D intensive SMEs will now claim under this R&D Merged Scheme.
Under the Merged R&D Scheme, there is a tax credit available that can be claimed by eligible trading companies within the charge to UK Corporation Tax (“CT”). The rate of the credit is 20% of the qualifying expenditure and the credit is liable to Corporation Tax, as it is deemed to be trading income (the same as the previous RDEC scheme).
As the RDEC credit rate has been 20% since April 2023, there will be no material change of % for large companies or SMEs that previously used RDEC. The calculation of the credit is very similar to that of RDEC scheme.
The expenditure credit or tax credit amount you receive in the accounting period cannot exceed the PAYE cap, unless you’re exempt from the cap.
The PAYE cap amount is £20,000 plus 300% of the company’s relevant PAYE and National Insurance contributions liabilities.
If you’re claiming under the merged scheme and the amount exceeds the cap, any excess is carried forward as a Research and Development expenditure credit that you can claim in the next accounting period.
Rates for Profit Making Company
If a profit-making company incurs £100k on expenditure, the tax credit will be at 20% = £20,000. When taxed at 25%, this results in an increase to the CT liability of £5,000 – so the net benefit is £15,000, or 15% of the qualifying spend.
Rates for Loss Making Company
The headline rate above remains at 20%. However, after accounting for the reduced rate of CT of 19% for SME companies (e.g. those companies with profits of less than £50,000 (excluding RDEC claimed), the cash benefit would be £16,200. Using the tax credit of £20,000 again as an example – when you tax this at 19%, this results in an increase to the CT liability of £3,800 – so the net benefit is 16.2% of the qualifying spend. Therefore, loss making companies, or those paying tax at the 19% rate, obtain more relief.
Enhanced R&D Intensive Companies
These R&D intensive SME companies will receive more beneficial relief than those available for larger or less R&D intensive businesses. In order to claim the below for accounting periods beginning on or after 1 April 2024, the following conditions must be met:
- The company must be loss making;
- It meets the definition of being an ‘SME’;
- Its ‘relevant R&D expenditure’ (including that of any connected companies) is at least 30% of its total relevant expenditure (including that of any connected companies). For connected companies, you also need to consider worldwide companies covered by this period of time of the claim.
There is a one-year grace period where a company fails to meet the above definition in one year – such as in a scenario where the SME falls below the 30% expenditure intensity rate in a single year. The PAYE/NIC cap under this scheme is determined in the same way as the merged scheme. There are also anti-avoidance restrictions in place to avoid using short accounting periods to manipulate the intensity rates.
Benefits
A company under this scheme can:
- Claim an additional deduction equal to 86% of its qualifying costs in calculating its trading loss;
- Surrender its trading loss for a 14.5% payable tax credit, which is not liable to Corporation Tax.
The effect of this is that eligible companies may achieve a benefit of up to 27p for every pound spent on R&D activities, compared to 16.2p for other SME companies. For example, Company A is a loss-making SME and has qualifying expenditure of £300,000. The company has enhanced R&D of £558,000 (£300,000 + (£300,000 @ 86%)). If the company surrenders this loss for 14.5% tax credit, this provides a net cash benefit of £80,910 (£558,000 x 14.5%), or 26.97% of the qualifying expenditure.
Is Your Business Eligible to Claim?
It is important to remember that to claim this relief, you don’t have to work in a lab or wear a white coat. We have submitted successful claims for IT & Software businesses, Food & Beverage businesses, as well as the more obvious Healthcare & Medical, Manufacturing, and Engineering businesses.
Broadly speaking, the relief applies to companies undertaking projects which aim to seek an advance in science or technology. It could be that a competitor may have aimed to achieve a similar advance. Many businesses rule themselves out as a result of this. However, if the knowledge on how to achieve the advance is not in the public domain you can still make a claim.
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