Knowledge Library
Explore the complexities of R&D tax credits with our comprehensive knowledge library. Containing information on topics such as R&D eligibility criteria, HMRC enquiries, accounting and finance, qualifying R&D costs, R&D schemes, the claim process, R&D tax relief and the outcomes. Our knowledge library is the key to understanding R&D tax credits. Navigate the intricacies of the R&D tax credits available to businesses in the UK.
Accounting and finance
It is important to understand the financial position of your company and how the R&D application process will affect it. Knowing the key financial information required to complete the application is essential in order to guarantee a successful outcome of your R&D tax credit claim.
You will need to compile the following documentation:
- A full CT600
- Expense Records: Records of all expenses related to R&D activities including invoices and payment records for materials, labour, equipment and subcontractors.
- Time Sheets: Time tracking records that accurately show hours that employees and contractors spent on R&D activities.
- Accounting Records: General financial records such as profit and loss statements, balance sheets and cash flow statements.
- Cost Allocation: Documents highlighting how costs were allocated between qualifying R&D activities and general business.
- Tax Returns: Copies of relevant tax returns or forms where the R&D tax credit will be claimed.
Please read about other documents that are required to submit an R&D claim.
Under the SME scheme, R&D tax credits are simple to account for; they are non-taxable, meaning they only impact tax liability.
Under the RDEC scheme, R&D tax credits can be acknowledged as above the line in the accounts, resulting in your profit before tax. The financial boost received under the RDEC scheme is therefore subject to taxation.
Click here to learn more about accounting treatment for the SME and RDEC schemes.
If your accounting period begins on or after April 1st 2024, your claim will fall under the merged R&D tax credits scheme. Under the merged scheme, businesses can treat these credits as either of the following:
- A reduction in payable tax: the credit directly offsets tax liability
- A government grant: the credit is treated as profitable income across the course of the R&D project’s life, allowing it to reduce the expense
Please note that consistency and adherence to the accounting standards are a necessity.
Each claim varies depending on what scheme your business is eligible for. This is because different rates apply to the SME scheme and RDEC. Using an R&D tax credit calculator can provide you with an estimate of your claim’s worth.
If your accounting period begins on or after April 1st 2024, rates for SMEs and large companies will be at a fixed rate. This is due to recent changes in R&D tax relief. Click here to get a clear picture of the 2024 R&D tax credit rates..
The key details that you need to know when organising your CT600 corporation tax return are as follows:
- There’s a specific formatting requirement that you need to adhere to (HMRC do provide a guideline as to what information they require to support your claim)
- When you complete the CT600 with your benefit amount, you need to remember that the figures will need to be inclusive of the R&D expenditure as well as the tax credit amount
- When it comes to working out the enhanced R&D expenditure, you need to add the appropriate enhancement to your qualifying expenditure
- If you’re going to make a claim prior to filing your corporate tax return, you will need to file an amended CT600 return as well as computation so that HMRC will accept your claim
HMRC actively encourages businesses to explain why they feel that their project qualifies, as well as a summary that shows costs incurred by the research and development project(s). Choosing to share this information will help improve the validity of your claim.
If expenses eligible for R&D have been treated as an intangible asset, you can claim them by deducting the intangible asset’s cost in your tax calculation, either when it’s expensed or during its amortisation. This is a complex area where our assistance can be valuable. It’s important to note that you can only receive tax relief for the asset once. If it’s deducted as an expense in the tax calculation, any future amortisation related to that expense will need to be added back in subsequent tax calculations until the entire amortisation is concluded
If your eligible R&D tax credit expenditures are treated as intangible assets, you can claim them by deducting the cost of your intangible assets in your tax calculation – either when it’s expensed or during its amortisation.
It’s important to note that you can only receive tax relief for this asset once. If it’s deducted as an expense in the tax calculation, any future amortisation related to that expense will need to be added back in subsequent tax calculations until the entire amortisation is concluded.
This can be an incredibly complex area where our assistance can be highly valuable. Click here to get started with one of our expert consultants.
As R&D tax credit claims are considered to be a prior-year adjustment, you don’t need to restate the previous accounts before claiming, but the option is there if you want it.
As leading R&D tax credit consultants, our expert team can take leadership over your R&D claim to align it with HMRC’s standards, ensuring that you get the greatest benefit you’re eligible for.
Our no-win no-fee approach means that we’ll evaluate your project’s claim potential without any charges. This means that if your claim doesn’t yield any benefits, you will not be charged.
Alexander Cliffords aim is to simplify the R&D tax credits claim process in a way that saves you time, and with a successful track record, we’ve already obtained over £83 million for our clients.
Contact us today to get started on your R&D tax credits claim.
Eligibility criteria
The criteria serves as the gateway to valuable financial incentives and can significantly impact a company’s ability to innovate and remain competitive. By aligning research and development efforts with these requirements, businesses can not only access R&D tax credits but also strategically invest in innovation to propel their growth.
While qualifying activities for R&D vary across industries, all businesses looking to benefit from R&D tax credits, need to follow a four-criteria model, often known as the four part test. This model offers a precise perspective that helps determine whether a company is engaged in qualifying R&D activities.
The four part test consists of:
- Permitted Purpose: defines the R&D activities conducted with the aim of enhancing the performance, reliability, quality, and functionality of a product, service or software
- Technological Uncertainty: refers to the unpredictable results that may arise during development, including the associated processes
- Process of Experimentation: indicates the need for a trial and error phase with the intention to overcome technological uncertainties
- Technological in Nature: ensures that the R&D activities fall within the domains of engineering, physical sciences, biological sciences or computer sciences
As the idea behind R&D tax credits is to encourage new and exciting innovations, the carbon copy development of something that already exists will not qualify as R&D under the HMRC’s definition.
It’s important to note that HMRC has a specific definition of science, which means that advancements in the following fields will not qualify for R&D tax credits:
- Social sciences
- Arts and humanities
- Economics
- Pure mathematics
In addition, the following activities do not fall under the definition of qualifying research and development activities for R&D tax credits:
- Routine analysis
- Adaptation of a product
- Complete copying of an existing product
For these reasons, defining whether a project qualifies for R&D tax credits can be difficult. This is where Alexander Clifford can help, because our expertise in HMRC policy and guidelines allows us to easily understand what qualifies.
Furthermore, our team is able to aid qualifying businesses throughout their claims process, to ensure that the claim aligns with HMRC standards. Click here to determine your eligibility.
If your claim meets the eligibility criteria, you can make an R&D tax credits claim even if your project failed.
To be eligible, you simply need to prove that your project aimed for the advancement and resolution of uncertainties. In fact, failed projects can be more compelling than successful projects in demonstrating the innovative and challenging nature of work, as they highlight the pursuit of novel solutions rather than routine endeavours.
If your claim meets the eligibility criteria, you can make an R&D tax credits claim even if the project is not yet completed.
In the case of incomplete projects, it’s necessary to provide HMRC with a clear project narrative via your required documentation, that showcases the progress made and the work being conducted throughout the year that you’re claiming for. Providing this detailed information is essential in supporting your claim, as there will not yet be a finished product, process or software to present as evidence of your claim.
If you’ve been investing in research and development but your company hasn’t turned a profit yet, you may still be able to claim R&D tax relief. As a loss making company, you have the potential to receive a cash benefit for every pound spent on R&D. You are still eligible to make a claim if you haven’t turned a profit just yet. With SME R&D relief, even if your company is experiencing a loss, you can receive a tax credit worth up to 14.5% of the surrenderable loss. Additionally, you can deduct an extra 130% of qualifying costs from your annual profit, in addition to the standard 100% deduction, resulting in a total deduction of 230%. As a loss-making company, this means you have the potential to receive a cash benefit of up to 33% for every pound spent on R&D.
Many research and development projects span across multiple years, meaning as long as your activities are eligible and you have qualifying expenditure, long term projects can be used in more than one R&D tax credit claim.
You can take the same approach to filing your claim across the lifespan of your project, however if you simply resubmit the same documentation, there will likely be an enquiry which entails extensive questions. Click here to understand the importance of accurate record keeping.
One of the eligibility requirements is that claimants must be in trading. This means that if your company’s registration ceases to exist, you won’t be able to make an R&D claim. We have, however, helped to prepare R&D tax credit claims for clients who have absorbed and bought a limited company.
Companies that are liable to pay UK corporation tax are eligible to claim Research and Development (R&D) tax credits. Limited Liability Partnerships (LLPs) typically do not pay UK corporation tax, and therefore, they usually cannot claim R&D tax credits. As R&D tax credits are a type of corporation tax relief, LLPs are generally ineligible to claim them since they are not registered for UK corporation tax.
A company limited by guarantee can submit an R&D claim if it meets the standard eligibility criteria. R&D tax credits are a form of corporation tax relief, meaning they are usually available for any UK based company liable to pay corporate tax. This includes companies limited by guarantee, making them eligible for R&D tax credits.
As R&D tax credits are limited to companies that are liable to pay corporation tax, sole traders do not qualify for R&D tax relief.
According to recent HMRC legislation, companies that source sole traders to work on research and development related projects can claim the sole traders expense within their R&D tax credits claim.
Various methods can be used to determine the extent of research and development work performed by each staff member, some of which include:
- Time tracking tools
- Project management software
- Detailed time sheets
- Employee time logs
While we recommend that each company maintains accurate records regarding employee time contribution to research and development, there are some cases where there may be limited or no records at all. These cases require some degree of estimation, and thankfully HMRC understands that some companies (primarily first time claimants) may not have established comprehensive record keeping from the offset of their R&D projects.
If an SME is subcontracted to participate in a research and development project, they can only claim R&D tax credits if they are subcontracted by a large company.
This means that under the SME tax credit scheme, SMEs that have been subcontracted by other SMEs cannot make a claim themselves.
If a large company is subcontracted to participate in a research and development project, they can claim R&D tax credits under the RDEC scheme, regardless of the size of the company that subcontracted them.
If a company’s accounting period falls on or after April 1st 2024, they automatically fall under the new R&D tax credit scheme. The new scheme maintains that SMEs that have been subcontracted for a research and development project can only make an R&D tax credit claim for that project if they are subcontracted by a large company.
The short answer is no. If you have previously submitted an R&D tax credit claim, then you will not be able to resubmit a claim for a new case.
HMRC does accept that R&D projects (especially the more complex ones) can last multiple years, and in these cases it is important to detail the different stages of the project along with the different expenditure from each year.
So while the project may be the same, the content of the accompanying documents showcase the progress in your claim.
For prolonged research and development projects, you may refer to a previous claim as a frame of reference, to ensure that there is no overlap between the separate claims.
Unused tax credits can be carried forward for up to 20 years. By doing this, you are applying your unused tax credits to future tax liabilities.
If you choose to carry forward your R&D tax credits, you usually have two options:
- Give up your tax benefit in exchange for an immediate refund
- Apply the loss to your tax return from the previous year or future years without any time limit
Carrying R&D tax credits forward is a popular option for companies that didn’t turn a profit, as it expands their financial protection.
HMRC enquiries
HMRC enquiries are a cornerstone of maintaining financial integrity and fairness in the tax system. These investigations ensure that businesses fulfil follow the obligations accurately, preventing potential irregularities and protecting financial interests. Understanding their significance is vital for all stakeholders, and our library offers valuable insights into the scope, triggers, and procedures of HMRC enquiries, empowering you to navigate the complexities of R&D tax relief compliance with confidence.
In certain situations you are able to offset your R&D tax credit against any outstanding taxes you owe.
The reimbursements of tax and the disbursement of tax credits through the SME tax credit scheme, the RDEC scheme and the new merged scheme can be influenced by legislation that allows HMRC to deduct the amount owed by any outstanding tax before disbursing the remaining balance to you.
Reminder: this only applies if a formal tax payment deferral has been arranged.
Many businesses aren’t aware that their projects contain qualifying R&D activities until part way through the project, meaning they’ve not kept relevant documentation while completing their project.
HMRC therefore understands that not all R&D activity will be recorded (especially for first time claimants) and they keep this in mind when checking the validity of your claim.
Where possible, it is advised to reconstruct documents by piecing together various segments of information relevant to your R&D tax credit claim. Click here to understand what documents you will need for your claim.
If errors are identified during the enquiry process of your R&D tax credit claim, the inspector could judge that your claim should not be settled. Should you receive this judgement, here are the steps that you should follow:
- Review your claim
- Seek out an R&D tax credit consultant
- Amend the errors
- Submit the corrected claim
- Communicate transparently with HMRC
- Respond promptly
Having an incomplete claim however, could result in HMRC determining your claim as unsuccessful, while they contemplate whether or not your business should incur penalties for carelessness or negligence.
The most effective way to avoid HMRC enquiries is to know exactly what your R&D tax credit claim should contain.
You need to ensure that you are filing the correct costs with accompanying documents and a technical narrative that provides HMRC with all that they need to make a decision on your claim.
Furthermore, working with R&D tax credit specialist such as Alexander Clifford can help to minimise the risk of enquiry, as they have specialist insight into how to compile an accurate and complete R&D tax credit claim.
The short answer is yes, HMRC has the authority to delay reimbursement of R&D tax credits to ensure that your claim is up to their standards.
If HMRC have queries about your claim, they may investigate which places your reimbursement on hold until the investigation is complete. Unfortunately there isn’t an exact timescale for how long an investigation into your R&D tax credit claim may be.
However, as different aspects of your claim are mutually accepted throughout the course of the investigation, you can request partial payments that correspond with agreed upon terms. Furthermore, HMRC has the right to request the money back from an R&D tax credit claim. This typically happens when HMRC decides to open an enquiry after the payment has been processed.
This is why it is so important to submit an accurate and robust claim. Click here to find out how we can help improve your claim.
The short term impact of an enquiry will typically delay the payment of the R&D tax credits or the tax repayment.
During the enquiry process, an inspector will be assigned to gather further information on the research and development project, and the submitted cost claim. The inspector will usually do this by:
- Submitting questions via letter or email
- Meet with professionals involved in the claim
- OR a virtual call through which the necessary questions are asked
If the claim is being handled by Alexander Clifford, we will be on hand to manage the enquiry process for you, taking the lead to let you know what additional information is required, and even to prepare you should a meeting with the investigator take place.
If your claim has been handled by either you or another company, we can still help by providing enquiry support. Once the investigator is satisfied, they will close the case and arrange for the claim to be settled and the R&D tax credits or tax repayment to be paid.
In cases where the investigator is not satisfied, they will not close the enquiry, but it is possible to reach an agreement in each of the enquiry focus points. This allows the enquiry to be settled with negotiation.
Being responsible for R&D tax relief, HMRC’s role is to issue guidelines and to safeguard the R&D tax initiative by ensuring that every successful claim is compliant.
The guidelines and the rules set by HMRC are reviewed periodically, meaning policy and legislation changes are typically updated annually. Major changes are usually introduced in order to cater to adhere to industry needs and advancements.
Following R&D tax credit guidelines, companies or consulting agents create the necessary documentation that is submitted directly to HMRC. The HMRC will then analyse and check submitted reports before deciding whether to approve, query or class the claim as unsuccessful with the possibility of penalties.
Since 2022, HMRC have been stricter on their policies and frequently open more enquiries to determine the authenticity of a claim and to address potential anomalies.
These are the most common reasons for an enquiry into your R&D tax credit claim:
- Compliance check to determine eligibility
- Incomplete documentation
- Inaccurate claims
- High expenditure claims
- Industry specific issues
- Previous issues
When facing an enquiry, HMRC will typically communicate the reasons and what they need in order to verify your claim. Click here to understand how you can prevent making some of the common mistakes that lead to enquiries.
As there are a number of factors to be considered during an enquiry, it can take anywhere from a few weeks to several months for it to be resolved.
The great thing about Alexander Clifford is that we utilise the skills of our diverse team to ensure that your claim is completed with accurate information that reflects the claim. Due to our detailed insight into HMRC policy, we have been able to keep our enquiry rate below 1%.
At Alexander Clifford, we have expert knowledge on the R&D tax credit claims process that allows us to prepare and submit claims that will hold to scrutiny. For this reason, our enquiry rate is below 1%. When a client is faced with an enquiry, we ensure that we offer support through every step of the process, using our knowledge of the guidelines and the confidence in our expertise to help alleviate any stress our clients may feel.
Furthermore, we take the lead on the enquiry to carry out claim negotiations, leading to a calm and successful outcome.
Click here to find out how we can help you through your claim.
Qualifying expenditure
Qualifying R&D costs serve as the bedrock of innovation-driven financial incentives, making it crucial for businesses and researchers to grasp their significance. These costs not only impact budgeting and financial efficiency but also determine eligibility for valuable R&D incentives, including tax credits and funding opportunities.
- Employee wages: The salaries, wages, and benefits of employees directly involved in R&D activities are generally eligible for claiming. This includes researchers, scientists, engineers, and other technical staff.
- Materials and supplies: Costs associated with purchasing materials, components, and consumables used directly in R&D projects are eligible. This includes raw materials, prototypes, and experimental equipment.
- Software: Expenses related to purchasing or licensing software used exclusively for R&D activities can often be claimed. However, software used for routine or administrative purposes may not qualify.
- Subcontractor costs: In some cases, costs incurred for subcontracting R&D work to external entities can be claimed. The rules for subcontractor costs can vary by jurisdiction, and only a portion of these costs may be eligible.
- Externally Provided Workers (EPWs): If you engage externally provided workers (EPWs) for R&D work, a portion of their costs may be eligible. EPW expenses are subject to specific rules and may vary by jurisdiction.
- Overhead expenses: Some overhead expenses directly related to R&D activities, such as utilities, rent, and depreciation of R&D-specific facilities or equipment, may be claimable. However, general overhead not directly tied to R&D work is usually excluded.
- Prototyping costs: Expenses associated with creating prototypes or pilot models as part of the R&D process are typically eligible.
- Testing and certification costs: Costs related to testing and certification necessary for the R&D project may qualify.
- Clinical trial costs: If your R&D involves clinical trials for pharmaceutical or medical products, certain expenses associated with these trials may be eligible.
- Consulting fees: Fees paid to consultants or experts providing technical expertise related to R&D projects may be eligible in some cases.
- Travel expenses: Travel expenses directly related to R&D activities, such as attending conferences, conducting fieldwork, or collaborating with research partners, may be claimable.
Please read the blog for in-depth information on R&D qualifying costs.
The short answer is that yes, it matters who pays for the R&D if your company falls under the definition of an SME (small and medium sized enterprise), but not if your company falls under the RDEC.
Under the SME scheme, companies can’t claim R&D tax credits for subsidised R&D. SMEs looking to make a claim for subsidised R&D work performed for a large company can however, make a claim under the RDEC scheme.
Under the RDEC scheme, it doesn’t matter who pays for the R&D, as companies can claim for the work that they do. However, companies under the RDEC scheme can’t claim for R&D projects that have been given to other companies, only work that has been subcontracted out to individuals, groups, certain organisations or universities.
For companies whose accounting period begins before or after April 1st 2024, SMEs can still only claim for subsidised R&D performed for large companies, and not subsidised R&D for fellow SMEs. This is in accordance with the new merged scheme.
Typically you cannot include VAT costs in an R&D tax credit claim.
There is an exception however, if your VAT costs are not recoverable via a VAT return. This exception will be determined through your VAT classification.
The qualifying employee expenses are:
- Salaries
- Wages
- Class 1 NIC
- Pension fund contributions
These eligible employee expenses can only be claimed for staff that are directly involved in the R&D activities, and for the time that they spent on these activities. For this reason, it’s important to keep accurate documentation in regards to staff involvement.
Various individuals from different areas of your business may be engaged in your R&D endeavours. It is essential to evaluate each individual’s actual role, rather than focus on just their job title, in a qualifying project.
An individual’s official designation is less significant than determining whether they genuinely participated in qualifying direct or indirect R&D activities.
To identify staff costs eligible for R&D tax relief, you should first ensure that the work is relevant to your trade and part of a specific project seeking advancements in science or technology.
After identifying the qualifying R&D project, assess the project’s boundaries and identify the expenses that can be included in your claim. Often, the most substantial R&D cost is the staffing expenses of individuals involved in the R&D.
It is crucial to identify not only the individuals engaged in the projects but also the specific activities they performed and the proportion of their total time dedicated to those particular R&D activities. This is why we recommend you keep your entire R&D project well-documented with time sheets. The more detail, the better! With that said, HMRC understand that first-time claimants most likely aren’t aware of this, and so they can make justified estimates in your claim, backed up your technical narrative.
In your R&D claim, you need to provide a reasonable explanation for how much time your staff worked on R&D claims. Staff costs come under 2 categories of activities that directly contribute to the resolution of technological uncertainty and qualifying indirect activities. This is because staff costs are a qualifying expenditure. The best way to present this information to HMRC is through timesheets. Because many businesses retrospectively claim for R&D tax credits, they’re naturally not keeping documentation because they’re not aware of either RDEC or the SME R&D tax credit scheme.
The costs related to staffing payments during the furlough period cannot be included in your R&D tax relief claim.
The primary reason for excluding this expenditure is that under the Coronavirus Job Retention Scheme (CJRS), furloughed employees are not allowed to perform any work for the company. As a result, they cannot be considered actively engaged in relevant R&D activities during the furlough period.
The costs that should be excluded from the claim encompass the gross salary for the furloughed period, employers’ National Insurance Contributions (NIC), and pension contributions, even if these expenses were not entirely covered by government funding.
R&D tax credit scheme
R&D tax credits are not just financial incentives; they are a driving force behind innovation and economic growth. These credits can significantly impact an organisation’s ability to invest in research and development, stay competitive, and contribute to technological advancement.
Research and development (R&D) tax credits are a UK government incentive designed to encourage businesses to invest in technological and scientific advancement. They do this by providing financial benefits and tax incentives to eligible businesses that engage in R&D activities.
These credits typically cover the expenses related to research and development such as:
- Staff pay costs
- Supplies and equipment
- Subcontractor payments
Prior to April 1st 2024 the R&D initiative consisted of two main schemes: the SME scheme and RDEC. (Research and Development Expenditure Credit)
If a company’s accounting period begins before or after April 1st 2024, then their R&D tax credit claim falls under the new merged scheme, which was formed to simplify the process.
As of April 2024, there are now three prominent R&D schemes. This is due to recent HMRC R&D updates that introduced a new scheme designed to simplify the claims process.
If your accounting period begins prior to April 1st 2024, your R&D tax credit claim will fall under one of the following schemes.
Offers R&D tax credits to SMEs (small and medium sized enterprises) that have fewer than 500 employees, have an annual turnover of under €100m, and a balance sheet under €86m.
Offers R&D tax credits to large companies with a staff headcount of over 500, have an annual turnover of over €100m, and at least €86m or more in gross assets.
If your accounting period begins on or after April 1st 2024, your R&D tax credit scheme will fall under the new merged scheme, which incorporates the SME and RDEC schemes.
As your business scales up or down, you might not qualify for the same R&D tax credits as before. These changes won’t affect your status until they apply for two years in a row, known often as the ‘year of grace.’
If a large company buys your SME however, this grace period is skipped and you’re immediately considered as a large company. This is important in industries with many mergers and acquisitions.
Switching between SME and large company status may affect the R&D tax credit benefits you get, depending on the beginning of your accounting period. This is because the rates and qualifying expenses differ between the SME and RDEC schemes.
If your accounting period begins on or after April 1st 2024 however, the R&D tax credit benefits will be the same regardless as to whether your company is classed as large or as an SME. This is due to recent HMRC legislation changes that introduces a new merged R&D tax credit scheme.
Under HMRC’s definition, a subcontractor is an external business or individual that is brought on board to perform specific services in relation to the R&D project, when there is a lack of in-house expertise.
Payments to subcontractors are typically paid directly and not through a third party such as an agency.
EPWs (externally provided workers) are temporary workers who are supplied to a company from an external entity.
These workers function similarly to regular employees but are compensated through invoices sent to the third party staff provider, as opposed to being on the company’s payroll.
EPWs can come from a staffing agency, a connected company, or a personal service company.
Consumable items are physical expenses that can be claimed for R&D tax credits. These include things like water, fuel, power, and materials that get used or changed during R&D.
The expenses must be for activities recognised as R&D, including indirect activities and apply to both SME and RDEC schemes for all company sizes.
If a chemical can be reused, you can still claim it, however if an item is still usable in its original form after R&D, you can’t claim its cost.
For profitable companies, R&D tax credits will always have a positive impact on cash flow, since the first step offsets against corporate tax.
However this may not always be the case for participants under the SME scheme that are operating at a loss, as R&D tax credits will partially or completely offset the pre-existing loss.
Therefore, it’s important to take into account that the R&D scheme may not be financially beneficial for your situation. Sometimes preserving or increasing loss can be just as valuable as obtaining cash, especially if these losses can be used for tax relief.
The RDEC scheme however, involves caps and offsets that allow the claim to be carried forward for future use, although converting this into cash will depend on future calculations in subsequent years.
De minimis state aid refers to a form of state aid provided by the government to businesses, but it is subject to a maximum allowable amount over a specified period. For this reason, it may have a significant impact on SMEs (small and medium sized enterprises).
A company cannot claim SME R&D tax credits for costs within a project that is funded by de minimis aid.
This is why we at Alexander Clifford always advise our clients to stay informed of how certain funding may affect their R&D claims, throughout the duration of their research and development activities.
RDEC scheme
Research and Development Expenditure Credit (RDEC) scheme holds a pivotal role for large companies seeking to foster innovation and remain competitive in today’s dynamic business landscape. Knowing its insights is imperative to help large enterprises navigate the complexities of this tax incentive effectively, harnessing its potential for driving innovation and securing their position in the ever-evolving landscape of business and technology.
The Research and Development Expenditure Credit (RDEC) is a UK government scheme that was introduced in the year 2002.
The RDEC scheme offers large companies the opportunity to reclaim their qualifying expenditures incurred as a result of R&D activities.
The outcome of a successful claim can result in either a cash payment or the offsetting of a portion of their corporation tax.
The RDEC Scheme is formulated for larger companies that exhibit the following characteristics:
- A headcount of more than 500 as staff
- A turnover of over €100 million
- Or a balance sheet total of/or above €86 million
These companies need to be involved in R&D activities, incurring expenses related to these activities within the UK, and also paying corporation tax in the UK.
The RDEC rate has been established at 20% amid the recent changes to R&D tax relief, meaning businesses are now able to recover up to 20p for every £1 invested in eligible R&D activities.
It is advisable however, to check the latest rates and legislation before making an RDEC claim.
While HMRC does display the seven steps to applying for RDEC on their website, we want to provide you with a straightforward explanation:
- Step 1: The credit is used to create an agreement of what your corporation tax liability is
- Step 2: Any remaining R&D expenditure credit is reduced by applying a notional tax charge
- Step 3: Any credit higher than your company’s total expenditure on R&D workers’ PAYE and National Insurance contributions will be added to any expenditure credit in the next accounting period
- Step 4: Any remaining amount is used to pay outstanding corporation tax liabilities for accounting goods
- Step 5: The credit can be surrendered in whole or part to any group member
- Step 6: The credit can be used to discharge any other company liabilities such as VAT
- Step 7: The final amount can be paid to the company
Learn more about RDEC.
If you are making use of the RDEC (Research and Development Expenditure Credit) scheme, then you have less choice than an SME as there is a process to ensure that before cash benefits are paid out, all options to use the credit to offset your owed tax are explored and used.
At times, this can mean that some excess credit is carried forward.
You can show RDEC in your tax computation by first ensuring you’re using the up-to-date rates for the tax year you’re claiming in. Here are the steps HMRC describes:
- First, the credit is employed to settle the corporation tax liability of the claiming company for the same accounting period.
- The remaining balance may undergo an adjustment to reduce it to a net-of-tax amount, which is then available to offset future Corporation Tax liabilities.
- Any surplus amount is capped based on the PAYE/NIC (Pay As You Earn/National Insurance Contributions) of the R&D staff (without time spent restrictions on qualifying R&D activity) and externally provided workers from the same group as the claimant (restricted to the proportion of time spent on qualifying R&D activity). Any excess over the cap is carried forward as an expenditure credit for the subsequent accounting period.
- The remaining amount, which could potentially become a payable credit, is used to clear any other outstanding liabilities the company has with HMRC.
- If the company is part of a group, it may choose to surrender any remaining amount for a corresponding accounting period.
In essence, the payable credit element is applied to satisfy any other financial obligations the company has to HMRC.
Read more about the accounting treatment for RDEC.
SME scheme
SME tax credit scheme serves as a vital source of support for small and medium-sized enterprises within the UK, propelling innovation and economic resilience. The SME scheme provides financial incentives with the potential to bring about transformative changes for businesses, fostering sustainability and expansion.
Whether your business is making a profit or operating at a loss, the UK government encourages research and development, as they contribute to economic growth, technological advancement and progression in regards to efficiency and sustainability across various industries.
To encourage this, the British government offers R&D tax credits as a tax relief to SMEs (small and medium sized enterprises) that invest in research and development activities. Meaning these tax credits offer businesses the opportunity to harness innovative thinking without being held back by a prospective financial burden.
Learn more about the SME scheme.
To be eligible for R&D tax credits under the SME scheme, your business must meet the following criteria:
- Have less than 500 employees
- Have an annual turnover of less than €100m
- Have a balance sheet total of under €86m
Note: The values are stated in Euros because the definition of SMEs was originally established via the European Commission. R&D tax credits however, have no affiliation with the European Union or any of its funding.
SMEs (small and medium sized enterprises) can claim R&D tax credits whether they are at a profit or a loss. The current rates are as follows:
- Enhanced deduction rates are 86% of qualifying expenditure
- Payable tax credit rates for loss making SMEs are 10% of the surrenderable loss
- Corporate tax rates for profit making SMEs are dependent on the accounting year of the claim being made
This helps reduce the company’s tax bill or gives a cash payment if the company is loss-making.
While there are differences in rates, the main difference between claiming as an SME versus under RDEC is the accountancy treatment.
For SMEs the tax credits are non taxable, and will only affect your tax liability. Under RDEC, the R&D credits that companies receive under RDEC are classed as credits when calculating the pre-tax profit.
Simply put, the SME scheme is what’s known as a below the line benefit, while the RDEC scheme is an above the line benefit.
When an SME subcontracts R&D work to other SMEs with the same shareholders, the claimable costs are affected.
Usually, you can claim 65% of the subcontracted R&D costs. However, if both companies have the same shareholders (connected parties), the rules change.
For unconnected subcontractors, you can include 65% of the R&D-related costs in your claim. If only part of the services is R&D, only 65% of that part is claimable.
For connected companies, the amount you can claim is either the payment made or the subcontractor’s actual R&D costs, whichever is lower. It’s advisable to seek professional advice for accurate claims.
The short answer is yes, SME R&D tax credit claims are impacted by grants, but the considerations are significant.
If an SME receives state aid for an R&D project, none of the project costs can be claimed for SME R&D tax credits for every £1 of state aid received. The project may still be eligible for R&D tax credits under the RDEC scheme however, if it meets the necessary requirements.
If an SME receives a grant that isn’t state aid, the SME may claim the grant funded portion of the project under RDEC, and the remaining amount under the SME scheme.
Note: The award of a grant to a large company does not affect its eligibility to claim under RDEC.
If the transition is organic, the status of the SME remains unchanged until the second year when it is achieved.
For instance, if an SME organically becomes a large company in year one and this status continues into year two, the company can make an SME claim in year one, but in year two they would need to claim under RDEC.
If the transition is the immediate result of a takeover or the sale of a group company however, the change is immediate.
An SME being taken over by a large company should consider shortening its accounting period to end just before the takeover. This allows them to benefit from making an SME R&D claim for the period before the takeover.
When you use the SME R&D scheme, there are a total of five ways you can get your benefit. Take a moment to read about each option below so that you can begin to work out which one is best for your business:
- Cash Reimbursement – This is when a claim has been made for the last two periods. These claims will result in a cash reimbursement if you have already paid your Corporation Tax.
- Tax Savings Against Your Corporation Tax – If your claim is due to be submitted in the year that you are filling your Corporation Tax return, then you may be able to get your benefit as a credit against your tax bill. However, for this to be the case, your business needs to be making a profit.
- Relief Against Losses – If you find that you are in a loss-making position after you have completed your R&D claim, then you can choose to carry back the amount to the previous year if it was a profitable year. You can also choose to carry it forward if you expect to be profit-making in the year coming. This process can enable you to generate a cash rebate against tax saved or as a tax-saving against your Corporation Tax.
If you are not concerned about cash flow, then a carry-forward is more valuable to you in the future as long as you do not need the cash injection into your business.
- Receiving a Cash Credit – If you are a loss-making company, then you can elect to get a cash payment that works as an exchange of any R&D enhanced losses that you have. This is a great choice for any company that needs a cash injection and is valued at up to 33p for every £1 spent on Research and Development.
- Opting for a Combination – Your final option is to choose a combination of the previous options. One example would be to make the saving against your Corporation Tax as well as carrying forward or back any losses to help offset them against your profits.
Deciding which option is right for your company can be tricky, especially when there are such a range of options and contexts. We would always advise that you engage with an expert to discuss your options.
The claim process
The process of claiming R&D tax credits can be a defining factor in potential outcomes. Understanding the intricacies of the R&D claim process is paramount as it serves as a critical bridge between innovation and financial incentives.
An R&D claim involves submitting an application to HMRC to receive R&D tax credits in return for efforts focused on industry innovations and advancements. These claims are linked to the UK Government’s R&D tax credit relief, introduced to support businesses dedicated to improving their products or services through iterative experimentation. The incentive encourages businesses to invest more in innovations and progress, stimulating the economical growth of the UK. Learn more about claiming R&D tax credits.
This depends on the complexity of your project. On average, we complete R&D claims in 2 weeks.
The standard deadlines for filing and amending company tax returns are as follows:
- The absolute deadline for making R&D tax credit claims is within two years of the accounting period in which the R&D expenditure being claimed is incurred.
- Profitable companies that are aware of the R&D tax scheme typically prepare an R&D claim within 9 months and one day of the accounting period ends when any tax due needs to be paid. This applies to both SME and RDEC claims, and the claim helps reduce the tax liability.
- For loss-making companies claiming an R&D tax credit or an RDEC payable credit, it is beneficial to submit the claim as soon as possible to improve cash flow.
You have the flexibility to make an R&D tax credit claim at any stage of the R&D process, not solely at the project’s conclusion. As long as there are eligible expenses within the financial year you are claiming, you can submit the claim. Ongoing projects can be claimed across multiple years or even retrospectively, with a two-year window for making amendments.
It’s natural for R&D projects to take a few years to complete. You cannot reuse a previous R&D tax credit claim. You cannot recycle or reuse a previous research and development (R&D) tax credit claim. Each claim must be assessed independently, considering the eligibility of your qualifying R&D activities and expenditures. However, if your work is ongoing and continues to address technological or scientific uncertainties, a single project can span multiple years for claiming purposes.
Starting from 1 April 2021, HMRC implemented a limit on the R&D tax credit payable to a loss-making SME. The cap sets the maximum R&D tax credits at £20,000, along with three times the total PAYE and National Insurance Contributions (NIC) liability of the company for the year. Companies making a claim for a payable R&D tax credit that is below £20,000 will not be affected by this cap.
Your R&D tax credit claim is submitted along with your corporation tax return (CT600). HMRC does not provide a specific template for the supporting information, but they do specify the type of details they require for an R&D tax credit claim. This includes a breakdown of the qualifying expenditure and a description of your R&D activities.
After determining the R&D tax credit benefit, you must enter this information in your company tax return (CT600). This includes the enhanced qualifying R&D expenditure and, if applicable, the payable tax credit amount. Learn more about required documents for submitting R&D claims.
To support your R&D claim, you need detailed documentation on the following to make a technical narrative:
- The technological advancements pursued by your company
- The obstacles encountered by your company
- The resources employed the results accomplished
There is no prescribed format for presenting the information in technical documentation to HMRC. Likewise, there is no standardised template for an R&D technical narrative. Additionally, it is recommended to incorporate case studies that provide detailed explanations of some example R&D projects. These case studies serve to illustrate to HMRC that the R&D tax credit guidelines have been accurately applied and comprehended. Alongside outlining the associated costs and specific example projects, your R&D technical documentation may encompass:
- Contextual information regarding your company;
- Particulars of the key individuals involved in your projects; and
- Descriptions of the technical challenges encountered in your projects.
Your accountant should be able to support your R&D claim, provided their knowledge is up-to-date with how to submit an R&D claim as well as the latest rollout of changes to the rates. R&D tax credits demand a thorough understanding of your industry to uncover the complete scope of your claim, and receive your reward! At Alexander Clifford, we value collaboration and are more than willing to work closely with your accountant to maximise your company’s R&D claim. Contact us now.
Yes, we recommend you do this. In our processes, we continually communicate with you so you’re in the loop. After we complete our thorough audit process to ensure your R&D tax credit submission meets our standards, we invite you to review it before sending it to HMRC.
It is essential not to engage with an R&D consultancy that doesn’t provide transparency and access to what they submit on your behalf. As responsible company directors, you should never allow anything to be filed as part of a tax return without your knowledge and review.
This varies depending on when you submit your R&D claim, certain times of the year are busier than others. HMRC has the goal of processing all R&D claims within 28 days. This can take longer if you have a particularly complicated claim.
The R&D tax credit claim has a time limit of two years from the conclusion of your accounting period. Within this period, you must submit your R&D tax credit claim for all eligible expenditures identified during that specific timeframe. This is because R&D tax credits fall under corporation tax relief, and the usual deadline for amending your corporation tax return is 24 months after the conclusion of your accounting period
Alexander Clifford has a trusted team that are experts in the process and know HMRCs guidelines inside out to offer the best advice possible to maximise your R&D claim. We can offer a range of services that ensure you are supported from start to finish. Contact us today for a free consultation.
The outcome
Successful R&D tax credit claims can bring significant benefits to businesses, such as reducing their tax liability, improving their cash flow, and funding future R&D projects. The outcomes of R&D tax credits extend far beyond mere financial gains; they are transformative for businesses, fostering innovation, growth, and competitive advantage.
If you want to know how you can expect to receive your benefit, then this is determined by both the scheme you use to make your claim and the current financial position your business is in. Interestingly, it can also be dependent on your own wishes as HMRC will take this into consideration.
Typically, companies can expect to get their entitlement:
- In a single cash payment.
- A reduction in your Corporation Tax
- A carry forward or backward of an enhanced loss
- A mix of the above!
If you use the SME R&D scheme, then you can expect to see a reduction against your taxed profits, or even get a cash payment if you are a loss-making company.
After compiling and submitting the claim, it typically takes HMRC around 4-6 weeks to process it. However, during peak periods, this processing time might be longer. Following the processing period, payment is usually made within 14 days.
The average claim amount is on the rise; the tax year of 2021-2022 increased by 11% to a total of £90,315. The amount of money you receive is dependent on how much you have spent, what R&D scheme (SME scheme or RDEC) you are applying for, and what tax year you are claiming. An R&D tax credit specialist can help you navigate this and let you know how much your R&D claim is worth.
A successful R&D claim has the potential to elevate your business by providing a financial boost and competitive edge over others. Here is what else you could achieve with an R&D claim:
- Tax credits or deductions – You pay less tax meaning you have a pot of funds to use to reinvest into your project, whether that’s to make more hires, drive your marketing strategy, or invest in new equipment
- Offset costs – Successful R&D claims may allow businesses to recover a portion of their qualifying R&D expenses. This helps offset the costs incurred during the research and development activities.
- Attract investment opportunities – A successful R&D is well regarded by prospective investors; it’s proof you’re doing something brand new and you’re dedicated to research and development. Your R&D claim could complement an investment grant, helping you to support the acceleration of your project.
- Obtain a competitive advantage – Stand out amongst other competitors with a successful R&D claim. Customers value accreditations and seeing you’ve been granted R&D tax credits could help create sales and spark interest in your project.
You can claim for what you spent on eligible R&D costs in the next tax year but you cannot reuse the same R&D claim. It’s natural for certain innovations to take over a year to complete the research and development needed. You’ll need new technical documentation created that reflects your involvement in R&D from the tax year you’re claiming in alone, stating where you were up to at the start of the financial year and what you did throughout the year. It’s important to note what counts as R&D and what doesn’t. Eligible R&D activities involve the work that is directly related to research and development and encompasses technical uncertainty. Therefore, the commercial, aesthetic, business administration, and production of your goods or services you cannot claim for because they’re not genuine R&D.
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