R&D Tax Relief

R&D tax relief, since its introduction in April 2000, is arguably the most generous set of tax rules currently on the UK statute book

Where eligible, SME companies are able to uplift their actual R&D spend by a notional +86%  for corporation tax deduction purposes. This has the effect of, either:

• Reducing the taxable profits, and hence the net corporation tax liability, or
• Converting this taxable profit into a loss, which can either be:
  • Carried back to create a corporation tax refund,
  • Carried forward to (hopefully) reduce future corporation tax payments,
  • Surrendered, to create an R&D tax credit refund (@10%).

To be eligible for the SME R&D tax relief, a number of conditions must be met:

• The business must be a UK limited company.
• The business can supply services or products.
• The R&D expenditure must be revenue in nature (whether expenses or capitalised), not capital.
• The underlying project must meet the government (BIS) definition of R&D, which is more onerous than normal product development. R&D, for tax purposes takes place when “a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology (ie faster, more reliable, stronger, safer, simpler, lighter, cheaper, smaller, greener, smarter, healthier, cleaner) through the resolution of scientific or technological uncertainty” – an R&D claim can be made if any of your (new or improvement to existing) product, solution or internal process is based on proprietary knowledge that is not readily accessible in the market, and can only be obtained by undertaking a project in-house.
• The constituent parts of the R&D spent must be related to costs incurred on:
  • Staff salaries,
  • Related employer’s NIC and pension contribution costs,
  • Consumable stores,
  • Sub-contract,
  • Software,
  • Data licenses,
  • Cloud computing costs.

R&D begins when work to resolve the scientific or technological uncertainty starts, and ends when that uncertainty is resolved (or work to resolve it ceases). R&D ends when knowledge is codified in a form usable by a competent professional working in the field, or when a prototype or pilot plant with all the functional characteristics of  the final process, material, device, product or service is produced.

R&D spend on a product which is specifically produced for and funded by a customer or government grant might not qualify under the SME R&D scheme, but it might qualify under the RDEC scheme. This is less generous than the SME scheme, but often still worth claiming. Since the change in R&D rules and corporation tax rates in April 2023, even if eligible to claim under the SME scheme, depending upon your circumstances, it is worth checking to make sure the RDEC scheme would not give a better outcome.

As well as maximising their overall claim for this R&D tax relief, companies may need to plan activities in advance and amend their remuneration policy, to maximize and bring forward their overall claim.

Recent changes and useful case precedents     New Submission rules delayed | Increase in R&D related enquiries |  Quinn Case (RDEC v SME Relief) | Refund Cap | Digital Claims | Tackling Abuse | R&D Credits Explained | Take-up Report | Loophole Closed | HMRC Advance Assurance | Interaction with Patent Box Relief 

R&D tax relief is claimed in the company tax return (form CT600), after, if required, making an advance notification submission and/or providing the additional information submission. Clients who are fearful that the R&D claim within their company is high risk and hence the tax return may be investigated by HM Revenue & Customs, through a corporation tax enquiry, may wish to consider taking out our tax investigation insurance.