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Knowledge Library

We have designed our knowledge library to help you understand the complexities of R&D tax credits. The library provides information on topics such as eligibility criteria for R&D tax relief, HMRC enquiries, accounting and finance, qualifying R&D costs, R&D schemes, the claim process, and the outcomes. It explains the key details that need to be known in order to navigate the intricacies of the R&D tax relief available to businesses in the UK.

  • Accounting and finance

    Explore the financial and accounting aspects of R&D tax credits

  • Eligibility criteria

    Determine your eligibility for R&D tax relief, who can claim, and more

  • HMRC enquiries

    Instances of HMRC enquiries and their impact on the outcome

  • Qualifying expenditure

    Everything you need to know about qualifying R&D costs in one place

  • R&D tax credit scheme

    Discover the ins and outs of R&D tax relief and their impact on business

  • RDEC scheme

    Explore the intricacies of RDEC and how it influences larger corporations

  • SME scheme

    Explore the insights about financial incentives for small businesses

  • The claim process

    Everything you need to know for claiming R&D tax credits

  • The outcome

    Discover the outcomes of R&D tax credits to make informed decisions

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 have:

  • A full CT600
  • Expense Records: Records of all expenses related to the R&D activities, including invoices, receipts, and payment records for materials, labour, equipment, and subcontractors.
  • Time Sheets: Time-tracking records for employees and contractors involved in the R&D project, showing the hours spent on qualifying R&D activities.
  • Accounting Records: General financial records, such as profit and loss statements, balance sheets, and cash flow statements, to demonstrate the financial position of the business.
  • Cost Allocation: Documentation showing how costs were allocated between qualifying R&D activities and other business operations, as only eligible R&D expenses can be claimed.
  • 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.

In the SME scheme, research and development (R&D) tax credits are simple to account for: they are non-taxable, meaning they only impact your tax liability. It is an enhanced deduction. On the other hand, for RDEC claims, the credit can be acknowledged above the line in the accounts, resulting in an increase in your profit-before-tax. The financial boost you receive under RDEC is subject to taxation. Learn more.

Each claim varies depending on what R&D scheme; the SME scheme and RDEC, you’re claiming under as they have different rates and therefore, different outcomes. The most important aspect of your R&D claim is the qualifying costs. Using an R&D tax credit calculator can provide an estimate of what your claim is worth.

There are a few key details that you need to know when filing your R&D tax credit claim and completing your CT600 corporation tax return.

The key details are:

  • There is a specific formatting requirement that you need to adhere to and HMRC do provide clear guidance on what they want to see in terms of information 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 take your qualifying expenditure and add on the appropriate enhancement. It’s important to take care when calculating this amount as it is one area in which HMRC state that lots of mistakes are made. 
  • It is also important to note that if you are going to make a claim for R&D tax credit after you have filled your Corporation Tax return, you will need to file an amended CT600 return as well as a computation so that HMRC will accept your claim.

HMRC actively encourage companies to explain why they feel their project qualifies, and they also like to see companies that have provided a summary that shows costs incurred by the research and development. Choosing to share this information will help to prove that you have taken due care and attention throughout the preparation of your claim and will help to avoid the need for an enquiry.

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.

Because an R&D tax credit claim can be considered as a prior-year adjustment, you don’t need to restate previous accounts before claiming but the option is there if you want it.

Our expert team can take leadership over your R&D claim, to align it with HMRC’s standards, retrieving the benefit you’re eligible for! We provide a no-win no-fee approach. We’ll evaluate your project’s potential for a claim without any charges. If your claim doesn’t yield benefits, there are no costs involved. Our aim is to promote R&D incentives, as well as simplifying the accounting process in a way that’s time saving for you. With a successful track record, we’ve already obtained over £83 million for our clients. Our stringent in-house compliance processes exceed HMRC’s standards, resulting in minimal enquiries and swift delivery of R&D benefits. Contact us today to begin your journey towards benefiting from R&D tax credits.

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.

The qualifying activities for R&D vary across industries, considering the broad scope of possibilities in their respective field. In order to ascertain eligibility for R&D tax credits, companies need to follow a four-criteria model, commonly referred to as the four-part test. This model offers a more precise perspective and helps determine whether a company is engaged in R&D endeavours. This include:

  1. Permitted Purpose delineates the R&D activities conducted with the aim of enhancing the performance, reliability, quality and functionality of a product or software.
  2. Technological Uncertainty refers to the unpredictable results that may arise during the development of a product or software, including the associated processes.
  3. The process of Experimentation indicates the need for a trial-and-error phase with the intention to overcome technological uncertainties.
  4. Technological in Nature means that the R&D activities must fall within the domains of engineering, physical sciences, biological sciences, or computer science.

The government wants to encourage new innovations and outside-the-box thinking. So, if you have a carbon copy of existing products, services, devices or processes, it won’t qualify for R&D. Nevertheless, activities aimed at achieving specific cosmetic or aesthetic effects using technology can still be eligible for qualification.

Sometimes people find it easier to understand what qualifies for R&D by looking at what wouldn’t count. 

Firstly, HMRC defines science in a precise way which, for R&D Tax credit purposes, doesn’t include:

  • Social sciences
  • Arts and Humanities
  • Economics
  • Pure Mathematics

Additionally, the following activities cannot be counted as seeking advancement in the fields of Science and Technology:

  • Routine analysis
  • Adaptation of a product
  • Complete copying of a product

For many, deciding if a project qualifies is a difficult area. This is where the team at Alexander Clifford can help because we are able to ensure we include what is needed and disregard what is not to optimise your application and ensure it is safe.

Yes, you can claim on a failed project if it meets the R&D eligibility criteria! To be eligible, you simply need to aim for the advancement and resolution of uncertainties. Even failed projects can be more compelling than successful ones in demonstrating the innovative and challenging nature of the work, as they highlight the pursuit of novel solutions rather than routine endeavours.

Yes, it is not necessary to actually achieve a scientific or technological advance or fully resolve the uncertainties to make a claim. The crucial aspect is that you are actively striving to achieve advancement and resolve uncertainties. In the case of incomplete projects, it is vital to provide a clear project narrative within the documentation you send to HMRC, stating the progress made and the work conducted during the year being claimed. Submitting the same R&D report without any updates on progress can raise doubts about the eligibility for the claim. Providing detailed information is essential in supporting the claim, as you won’t have the finished product, process, or service as evidence.

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.

You won’t be alone in this. In fact, many R&D projects have multi-year extensions, meaning that as long as you have expenditure that falls within the parameters of the guidance, then these projects can be used in more than one Rresearch and development tax credit claim.

This means you can take the same approach each year that is shown within your supporting documents (as long as the costs and descriptions change), and then can proceed to submit your application. However, if you simply re-submit the same documentation, then you are more than likely to have an enquiry opened and will need to answer a range of questions about how you collated and prepared your submission.

To submit an R&D claim, your company must be in trading, regardless of whether you’re making a profit or not. Therefore, if your company’s registration ceases to exist, you unfortunately cannot make an R&D claim. We’ve helped to prepare R&D claims for clients who have absorbed a bought 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 qualify for an R&D claim if it meets the standard eligibility criteria. Such a company does not have a share capital and instead has members, with their liability limited to the amount they contribute to the company’s assets. Companies limited by guarantee are often not-for-profit organisations, where any profits are reinvested back into the business rather than distributed to members.

R&D tax credits are a form of corporation tax relief, and they are generally available to any company subject to UK corporation tax. This includes companies limited by guarantee, just like companies limited by share capital, making them eligible for R&D tax credits.

Only companies that are liable to pay UK corporation tax are eligible to claim Research and Development (R&D) tax credits. Sole traders, as they do not pay UK corporation tax, are not eligible for R&D tax relief.

Various methods can be utilised to determine the extent of Research and Development (R&D) work performed by each staff member. The allocation of an employee’s time will rely on the type of R&D activities undertaken and the available records documenting how staff members spent their time on these specific tasks.

You need detailed records of the R&D activity of each member of staff. We recommend you use a robust timekeeping system. 

In cases where there are limited or no records available to verify the time spent on R&D activities, some degree of estimation may be necessary when allocating staff time. HMRC is understanding in such situations, particularly for first-time claimants who may not have established comprehensive record-keeping practices at the beginning of their R&D projects.

In the SME scheme, an SME can only claim R&D tax credits if they are subcontracted by a large company. This is different from the norm in the SME scheme, where usually only the company directly funding the R&D work can make the claim, as long as they have the correct understanding of what subcontracted R&D entails.

On the other hand, if a large company is subcontracted to perform R&D, it can claim the R&D tax credits under the large company under RDEC scheme. In this case, it doesn’t matter who pays for the work; the large company can still make the claim.

No. If you have previously submitted an R&D claim, then you will not be able to resubmit a claim for a new case. However, HMRC do accept that R&D projects, especially the more complex ones, can last multiple years. In that case, it is important to detail the different stages of the project and the different spend for each year so while the project might be the same, the content of the documents will reflect the different stages and spend for each year. If this is the case, then you might refer to your previous claim to ensure there is no overlap and as a way of remembering where the project was up to at the previous year end.

You can carry forward your R&D tax credit; unused credits can be forwarded for up to 20 years. By doing this, you are applying your unused tax credits to future tax liabilities. This is usually opted for by companies that didn’t turn a profit. In these cases, they have two key options. You can choose between giving up your tax benefit in exchange for an immediate refund or applying the loss to your tax return from the previous year or future years without any time limit.

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.

HMRC’s role here is to issue guidelines, definitions, and the rules that everyone follows when preparing and submitting an R&D tax credit claim. These are reviewed periodically, which means if you were involved in an R&D application ten years ago, the process will likely have become more rigorous and robust. HMRC adapts to changing needs, especially understandable in an area concerned with advances for so many industries.

Following those guidelines, company’s or specialised agents create the documentation to apply for the R&D tax credits, which goes to HMRC. Their regional departments will analyse and check the submitted reports before deciding whether to approve, query or class the claim as unsuccessful with the possibility of penalties.

In certain situations, you are allowed to offset your R&D tax credit against any outstanding taxes you owe. The reimbursements of tax and disbursements of tax credits through SME scheme and RDEC incentives can be influenced by legislation that allows HMRC to deduct the amount owed from any outstanding tax before disbursing the remaining balance to you. However, this exception applies if a formal tax payment deferral has been arranged.

Many businesses aren’t aware their project contains qualifying R&D activities until later down the line. This means they’ve not kept relevant documentation while completing their project. HMRC understands this situation for first-time claimants and they keep this in mind when checking your claim. You’re able to reconstruct documents, piecing together various segments of information, for your R&D claim.

Having an incomplete R&D claim application could lead to HMRC considering whether your business should incur penalties for carelessness or negligence. This could be the case if your R&D claim is not robust at the time that it is submitted. If errors are identified during the enquiry process and the inspector’s judgement is that the claim should not be settled, then there are several next steps to be taken.

The most effective way to prevent HMRC enquiries is to know exactly what your claim must contain, which you can find out in the Corporate Intangibles Research and Development Manual. You need correct costs, accompanied by documentation, and a technical narrative that provides HMRC with all the information they need. If you’re using a tax software, it’s best practice to check these figures manually before submitting. 

Relying on an R&D tax credit specialist such as ourselves to take leadership over your claim. This can prevent HMRC enquiries because they have a deep understanding of what is required in each claim, for each industry. From experience, they know common enquiries, and they’ll prevent these from arising.

Yes, HMRC has the authority to delay the reimbursement of R&D tax credits until your claim is up to their standards; correct numbers, a technical narrative that provides a detailed scope of your work and the completed documentation.

If HMRC have queries about your claim or the way you prepared your claim, they may investigate and they’ll withhold your tax repayment until the end of the investigation. There isn’t a set time of how long these investigations take to complete, they depend on the complexity of your case. 

During the investigation process, as different aspects of your claim are discussed and mutually accepted, you can request partial payments that correspond to the agreed-upon amounts.

It’s important to keep in mind that HMRC can request the money back. This happens when HMRC decides to open an enquiry after the claim has already been processed. You’ll have to pay a sum of it back at the end of the enquiry.

If an enquiry is started, the impact in the short-term will usually be a delay in the payment of the R&D tax credit and/or the tax repayment. An inspector will be appointed to the enquiry, and it will be their role to ask further questions about the R&D and the cost claims that have been submitted. The inspector will usually submit questions via either letter or email. They will usually also want to meet the competent professionals who have helped with the claim submission. With virtual meetings becoming more common, the enquiry can also appear as an agenda of questions that will be discussed on a call, especially if the industry, R&D, or project is complicated.

If the claim has been produced and submitted by Alexander Clifford, then we will be on hand to manage the enquiry process for you. We will take the lead and ensure you are aware of what additional information is needed and prepare you for meeting with the inspector if required. 

If your claim has been produced and submitted by yourselves or a different company, we can still help by providing enquiry support. 

Typically, enquires opened by HMRC are settled easily, as once the inspectors receive the additional information or explanations, they are satisfied that the original claim was accurate.

In these situations, the inspector will usually close the enquiry and arrange for the claim to be settled and the R&D tax credit and (or tax repayment) to be paid. If the inspector does not simply close the enquiry, then it is possible to reach an agreement in each of the enquiry focus points, and the enquiry then may be settled by negotiation.

Partly, this is because it is difficult to apply guidelines to developing science and technology. In other words, sometimes the guidelines do not cover everything because they cannot predict all the incredible innovations that will occur. 

In their latest update, HMRC announced that they are reviewing more claims in 2022 and will be using new measures from 1st April 2023 to help address anomalies and unforeseen consequences, as well incorrect, incomplete and fraudulent claims.

It does depend on a range of factors as to how long an enquiry will take and the standard time frame in anywhere between several weeks and several months.  

When a claim enquiry is in progress, there can be changes made to the methodology, and there will be an opportunity to alter the processes for record-keeping in preparation for any claims that are made later. Most companies that go through one of these enquiries typically utilise the feedback they are given from HMRC to streamline their future claim process.

The great thing about Alexander Clifford is that our team come from a variety of backgrounds. We take the skills of our team and use these to make sure that your R&D is completed with accurate information that reflects the company’s claim.

As we have detailed insight into the process that comes directly from the policymakers, we have been able to keep our enquiry level at less than 1%.

At Alexander Clifford our industry expert knowledge ensures that we submit robust and thorough applications which tends to lessen the chances of an enquiry in the first place. Having this expert knowledge allows us to prepare and submit claims that we know will withstand HMRC scrutiny. 

What happens within the enquiry will depend on the level of extra detail required. No matter what form this takes, it can feel like a daunting process which is why it is so important to us to support our clients all the way through. We know the guidelines inside out and this allows us to confidently support, clarify and reassure. 

With our expertise, we are best placed to carry out these negotiations and help to ensure your claim is successful.

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.

Yes, it does matter in the SME scheme. Companies cannot claim under the SME scheme if they are acting as subcontractors and conducting R&D for someone else. To be considered a subcontractor, the company must receive payment for carrying out R&D, regardless of the outcome. However, a distinction exists if a company develops a product and is paid only upon successful production of the finished product.

If an SME is subcontracted by another SME for R&D work, the paying company can claim the R&D tax credit. On the other hand, if an SME acts as a subcontractor for a large company, the SME doing the work can still claim, but under the RDEC (for large companies) instead of as an SME.

Subsidised R&D cannot be claimed under the SME scheme. In the RDEC scheme, the subsidy source (who pays) doesn’t matter; only the R&D work done by the claiming company can be included in the claim. However, under the RDEC scheme, R&D subcontracted to other companies cannot be claimed, and only work subcontracted to individuals, groups of individuals, or allowed bodies like universities are eligible for inclusion.

In general, you cannot include VAT costs in an R&D tax credit claim. However, there is an exception to this rule if your VAT costs are not recoverable through a VAT return. Whether you fall under this exception will be determined by your VAT classification.

As well as staff salary, pension and National Insurance (NI) contributions, you can also claim for employee expenses. Eligible employee expenses can be typically claimed for activities that involve scientific or technological innovation aimed at achieving technological advancement or resolving technical uncertainties. The specific criteria for what qualifies as eligible R&D activities can vary. Proper documentation of R&D activities and expenses is crucial. Detailed records should be maintained to support your claim.

Note: You cannot claim for benefits in kind.

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 incentives introduced by the UK Government aimed at promoting innovation and technological advancement. They provide financial benefits and tax incentives to eligible businesses that engage in qualified R&D activities. These credits typically cover expenses related to research and development, including employee wages, supplies, equipment, and contracted research services. The UK government introduced R&D tax relief to stimulate economic growth and competitiveness by supporting businesses in their R&D efforts. The initiative encompasses two types of R&D schemes: the SME scheme for small businesses, and larger companies utilise the Research and Development Expenditure Credit (RDEC).

There are two different R&D schemes you can apply for, depending on the size of your business. 

The SME scheme:

The SME Scheme is designed for small companies with less than 500 staff, a turnover under €100m, and a balance sheet under €86m.

The RDEC scheme:

RDEC offers R&D tax credits to larger companies with a staff headcount over 500, a turnover of €100m or more, and at least €86m or more in gross assets.

As your business scales up or down, you may no longer meet the eligibility criteria for the previous scheme you received R&D tax credits from. 

These modifications will not impact your company’s status until the conditions are satisfied for two consecutive years. This period is commonly referred to as the ‘year of grace,’ allowing you to maintain your current status during the time when the thresholds are initially crossed.

However, there is one exception to this rule. If an SME is acquired by a large company or group, the year-of-grace provision is suspended, and the SME is considered a large company from the time of acquisition. This change in status applies for the entire period, not just from the date of acquisition.

This consideration is particularly crucial in sectors characterised by significant merger and acquisition activities.

Switching your status between an SME and a large company will have an impact on the overall benefit you receive from R&D tax credits. The rate of R&D tax credit varies between the SME R&D tax credit scheme and the RDEC scheme. 

Additionally, there are other distinctions between the two schemes, including the types of expenditures you can include in your claim and the relief mechanism applied.

A subcontractor is a business or individual engaged by a company to carry out specific work as a component of a larger project. In the context of R&D, subcontractors are brought on board to perform specific services related to the R&D project when there is a lack of in-house expertise to handle it. They are usually specialists in their respective fields.

Payments to subcontractors are typically made directly, without involving a third-party staffing agency.

EPWs (Externally Provided Workers) are temporary workers who are supplied to a company by an external entity. These workers function similarly to regular employees but are remunerated through invoices sent to the third-party staff provider, rather than being directly on the company’s payroll. You may have an EPW from a staffing agency, a connected company or a personal service company.

By ‘consumable items’, this refers to straightforward physical expenses eligible for claiming. Claims are limited to goods utilised or changed during R&D activities. Consumables encompass straightforward items like water, fuel, and power, as well as transformable materials, including laboratory chemicals that are converted into usable products due to the R&D. The expenses must be utilised in any activity recognized as R&D for tax purposes, which also covers ‘qualifying indirect activities.’ This definition is applicable to both the SME scheme and the RDEC scheme, regardless of the company’s size, be it small or large.

If a chemical is recyclable, it would not be excluded from the claim. However, if a physical item remains usable in its original form after R&D, its cost cannot be claimed. The fact that the item is no longer new would not qualify as a transformation solely due to its use.

A typical R&D claim will have a positive impact on cash flow. This isn’t the case for the SME scheme, if you’re not making a profit, your R&D tax credits will essentially partially or fully offset your pre-existing losses. This is important to consider early on in your R&D claim as it may be the case that the R&D scheme may not financially benefit your specific situation.  Sometimes, preserving or increasing losses can be just as valuable as obtaining cash, especially if these losses can be utilised for tax relief. With the RDEC process, which involves caps and offsets, a claim might result in the creation of an RDEC that can be carried forward. However, converting this into cash will depend on future calculations in subsequent years through the RDEC steps. For profitable companies, RDEC will always have a positive impact on cash flow since the first step offsets against corporation tax.

The de minimis state aid impact can have a significant effect on an R&D claim, particularly for small and medium-sized enterprises (SMEs). De minimis 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. 

A company cannot claim SME R&D tax credit for costs within a project that are funded by De Minimis aid. It is essential for businesses to be aware of the de minimis state aid impact on their R&D claims and carefully monitor their funding sources to avoid crossing the threshold and potentially losing out on R&D tax incentives.

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 government scheme that was introduced in 2002. The RDEC scheme offers larger 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. Learn more.

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. Businesses are now able to recover up to 20p for every £1 invested in eligible R&D activities. This rate remains consistent irrespective of the financial circumstances as opposed to the SME scheme.

Note: It is advisable to check the latest rates and legislations before making an RDEC claim.

HMRC lays out the steps on the government website here, but we’ll try to explain it more concisely.

  • 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 Research and Development Expenditure Credit (RDEC) 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

  1. First, the credit is employed to settle the corporation tax liability of the claiming company for the same accounting period.
  2. 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.
  3. 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.
  4. The remaining amount, which could potentially become a payable credit, is used to clear any other outstanding liabilities the company has with HMRC.
  5. 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.

The UK government offers R&D tax credits as tax relief to encourage small and medium-sized enterprises to invest in research and development activities. The government encourages research and development activities, whether or not you’re making a profit, because they contribute to economic growth, technological advancement, and the progression of society with opportunities for efficiency and sustainability across all industries. So it is safe to say that R&D tax credits allow you to take actions based on your innovative thinking without being held back by cost, ultimately enabling you to expand your business operations by hiring top-notch talent, investing in marketing, offsetting expenses, or acquiring the necessary machinery. Learn more about the SME scheme.

To qualify for SME status and be eligible to claim R&D tax credits, you need to meet the following criteria: 

  • Less than 500 staff 
  • A turnover of under €100 million 
  • Or a balance sheet total of under €86 million 

Wondering why the values are in Euros? Well, the definition of SMEs was originally established by the European Commission. However, it’s worth mentioning that R&D tax credits have no affiliation with the European Union or its funding in any manner, irrespective of the origin of the SME definition.

For companies claiming R&D relief for periods beginning on or after 1st April 2023, their entitlement will be calculated on the basis of the new rates implemented by HMRC: 

  • SMEs trading at a profit or loss can calculate their entitlement based on the R&D enhancement. The R&D enhancement is calculated on 86% of the qualifying expenditure which is then added back onto the qualifying expenditure to give you the enhanced expenditure (186%).
  • Entitlement Payable – If the normal taxable profit/trading loss is lower than the R&D enhancement, it leads to a trading loss after R&D. In this case, the surrenderable loss will be a loss after trading relief, and the entitlement payable will be calculated at 10% of this amount.
  • Corporation Tax Refund – If the normal taxable profit/trading loss exceeds the R&D enhancement, it leads to a trading profit after R&D with no surrenderable loss. In this case, the entitlement payable will be calculated at the Corporation Tax rate of 25% of the R&D enhancement. This can result in a Corporation Tax reduction or refund if the tax has already been paid.

There are differences in the rate. From the changes in April 2023, the RDEC rate increased from 13% to 20%, the SME additional deduction rate reduced from 130% to 86%, and the SME payable credit rate decreased from 14.5% to 10%. Therefore your benefit will differ depending on which scheme you’re eligible for. 

The main difference between claiming as an SME versus under RDEC is in the accountancy treatment. For SMEs, the tax credits are non-taxable and will only affect your tax liability. They are a below-the-line benefit but under RDEC, it’s an above-the-line benefit. Under RDEC, the R&D credits that companies receive under RDEC will be classed as credits when calculating the pre-tax profit.

When an SME subcontracts R&D work to other SMEs with the same shareholders, it impacts the costs that can be claimed. Typically, when you subcontract R&D work, up to 65% of the costs can be included in your R&D tax credit claim. However, if the subcontractor and your company share the same shareholders (considered connected parties), different rules apply.

For unconnected subcontractors, you can claim 65% of the costs related to the R&D work they perform on your behalf. If only a portion of their services is R&D-related, you can only include 65% of that specific proportion in your R&D tax credit claim.

On the other hand, for connected companies (having the same shareholders), the calculation becomes more complex. The amount you can claim may be more or less than 65%, depending on the actual costs involved. Seeking professional advice is recommended to ensure accurate capturing of these costs.

For R&D work subcontracted to a connected party, you can claim R&D tax credits based on the lower of either the payment you make to the subcontractor or the relevant expenditure of the subcontractor.

Yes, for SME claims only, these considerations are significant. 

If an SME receives State Aid for an R&D project, then every £1 of State Aid received means that none of the project costs can be included in an SME R&D claim. However, the project may still be claimed under RDEC if it meets the RDEC rules (except for mainly work subcontracted to other companies, which cannot be claimed under RDEC).

If a grant does not qualify as State Aid, for instance, if it is not awarded or administered by the state, such as an EU Horizon 2020 grant, or if it falls under De Minimis and the company has not exceeded the threshold where De Minimis grants are treated as state aid, then an SME can claim the grant-funded portion of the project under RDEC and the remaining portion under the SME scheme.

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 remains unchanged until the second year when it is achieved. For instance, if an SME grows organically and becomes a large company in year 1, and this status continues into year 2, the company can make an SME claim in year 1, but in year 2, it would need to claim under RDEC, as they no longer meet the SME eligibility criteria.

However, if the change in status is a result of a takeover or sale of a group company, 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. What matters is the company’s status in terms of the SME test thresholds at the end of an accounting period.

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:

  1. 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.
  2. 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.
  3. 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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