R&D tax relief is a valuable tax relief for companies investing in innovation.
Relief is not restricted to particular industries and broadly may be available to many companies undertaking a project of a scientific or technological nature.
The rules and qualifying criteria for R&D tax relief are complex and changes to the relief in recent years, alongside an evolving compliance landscape, have introduced further complexity:
- Identifying which scheme, if any, a company can claim under,
- Identifying and describing which projects undertaken are qualifying R&D projects, and
- Identifying and apportioning eligible R&D expenditure incurred on those projects.
For accounting periods beginning before 1 April 2024, different schemes are available for:
- Small and medium-sized enterprises (SMEs),
- R&D intensive SMEs, and
- Large companies (Research and Expenditure Development Credit ‘RDEC’). In some circumstances, SMEs may be required to claim wholly or partly under the scheme intended for large companies.
For accounting periods beginning on or after 1 April 2024:
- The SME and RDEC schemes have been blended to create the R&D merged scheme. R&D intensive SMEs continue to enjoy enhanced support through the enhanced R&D intensive support (ERIS) scheme.
For a project to be eligible for R&D relief it must be seeking to achieve an advance in overall knowledge or capability in a field of science or technology (including pure mathematics from 1 April 2023). This must represent more than an advance in the company’s own knowledge or capability alone and care should be taken to differentiate between broader commercial projects which are ‘innovative’ or ‘novel’, and those projects which represent a genuine advancement. We can help support you in this area.
If a particular advance in science or technology has already been made or attempted by someone else, work to achieve the same or similar advance may still be eligible for R&D tax relief a claim if the details of how this was achieved are not readily available (for example it may be a trade secret).
In seeking to achieve the advance, the company must also attempt the resolution of scientific or technological uncertainty. This exists when the knowledge of whether something is possible or feasible, or how to achieve it in practice, is not readily available or deducible to a competent professional working in the field of science or technology in which the advance is sought.
A project which seeks to make an appreciable improvement to an existing process, material, device, product, or service through scientific or technological changes may be qualifying R&D. R&D can also arise from transforming something that is established as scientifically feasible into a cost-effective product or service. If the scientific or technological advance sought by the project isn’t achieved or fully realised, this may still be eligible R&D too.
In contrast, improvements, optimisations, and fine tuning which do not materially affect the underlying science or technology will not be eligible R&D. Similarly, routine analysis, copying or adapting an existing product, process or material will not be eligible. Generally, activities which do not directly contribute to the resolution of the scientific or technological uncertainty are out of scope (eg commercial, financial, and marketing activities related to the innovation).
What scheme is a company eligible for?
Determining the appropriate scheme can be complex and an area that we can advise upon; the conclusion may be based on a company’s size, its subsidised position, and sub-contracted position.
An SME, for R&D tax purposes, is a company with 500 or fewer employees and either turnover not exceeding € million or gross assets not exceeding €86 million. The consolidated worldwide group is considered in determining the size, as well as considering any linked or partner enterprises which are the subject of more detailed rules.
Care in preparing a claim is needed when the qualifying R&D expenditure of an SME has been subsidised (eg by a grant, a subsidy, or customer contributions), as relief under the SME scheme may be reduced. Relief may instead be available under the RDEC scheme for the funded element of the expenditure.
Relief is not available under the SME scheme if a company is undertaking R&D sub-contracted to it by another party. In some circumstances, relief may still be available under the RDEC scheme, depending on the party contracting out R&D to the claimant.
For accounting periods beginning on or after 1 April 2024, the ‘merged scheme’ removes the complexity of subsidised expenditure, but reinvents the concept of sub-contracted R&D.
Revenue v capital spend
The rules described in our articles apply to revenue expenditure – either expensed or classified as an intangible fixed asset. Expenditure that is capital in nature for tax purposes (eg capital assets used in the R&D work) may be eligible for a R&D capital allowance at 100%, so that the expenditure is fully relieved in the year it is incurred.
Whilst R&D relief for revenue expenses is available only to companies, there is no restriction on the type of business that can claim R&D capital allowances. If you would like further information on this, please get in touch.
Notification and submission of a claim
R&D tax relief claims must be made within two years of the end of the accounting period to which they relate. Additional advanced notification requirements apply to accounting periods beginning on or after 1 April 2023 which can require a claimant to notify HMRC of their intention to make a claim. This applies to companies:
- Making a claim for the first time, or
- Making a claim when the last claim was made more than three years before the end of the claim notification period, or
- Making a claim where previous claims submitted within the claim notification period are not considered ‘made’ under complex transitional rules. A claim is not ‘made’ for these purposes if it:
- Is for an accounting period beginning before 1 April 2023, and
- Is made on an amended return, and
- The amended return was submitted on or after 1 April 2023.
Notification must be made within six months of the end of the accounting period for which the claim relates and is completed via submission of an online form. Failure to notify in time will prevent a claim from being made.
A mandatory form – the ‘Additional Information Form’ – was introduced for all claims submitted from 1 August 2023. This prescribes the high level outlining of the eligible expenditure and how many detailed project descriptions must be provided to HMRC. The form must be submitted prior to submission of the R&D-inclusive tax return.
How Saffery can help
Having undertaken claims for companies of all sizes from all sectors (including but not limited to manufacturing, IT, pharmaceutical, construction, food, and beverage and agricultural), Saffery ensures that claims are both maximised and robust.
Our approach is flexible and tailored to your company’s requirements to ensure that the process is cost and time efficient. Our involvement can vary from initial workshops and feasibility work, to reviewing a claim prepared by your company, to preparing the supporting claim documentation alongside you. Our work can help you to identify whether any of your company’s activities might constitute R&D for tax purposes, which scheme is appropriate to claim under, and the quantum of the claim.
Alternatively, if you have already submitted R&D tax credit claims but HM Revenue & Customs has opened an enquiry into your claim, we can work with you to bring this to a conclusion.
If you have any questions on the matters discussed, please get in touch with either Rachel Chappell or Ollie Bull.
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