R&D Tax Credits

A business can submit an R&D tax relief claim at any time up to the first anniversary of the filing due date of the company tax return for the accounting period in which the claim is made (paragraph 83E(1) of Schedule 19 to the Finance Act 1998). This means that a business can make a claim for R&D tax relief going back 2 accounting years. The claim can be made in a company tax return or in an amendment to it.

Many businesses don’t realise that they are undertaking eligible qualifying activities. It is not uncommon for their accountants to forget to tell them about R&D Tax Credits or even to tell them that they don’t qualify. If your technical lead (the R&D manager, lead engineer, or lead developer) is struggling to overcome the technical challenges of your project – if they are scratching their head wondering how to proceed, or losing sleep worrying about the technical uncertainties they face – your project will almost certainly qualify for R&D Tax Credits.

HMRC will follow guidance in their Statement of Practice SP 05/01 to deal with claims that are late. The success of these appeals depends on the facts of the case in hand; however, it is very rare that HMRC will allow a late claim based on not having sufficient time or not being aware of the R&D tax relief scheme.

When you make a claim for R&D tax relief it will be reviewed and processed by one of the HMRC R&D specialist units. It is normal practice for an Inspector at the HMRC R&D unit to review the first claim that is made by a business. The Inspector will risk assess the claim and this will determine the level of reviews for subsequent claims. If the Inspector has any questions relating to the claim then they will raise an enquiry, which is usually done by writing to the company. We strongly advise that a claim for R&D tax relief is supported by a detailed report which outlines the technical advancement and uncertainties as well as providing a detailed breakdown of the eligible R&D costs.

One of the conditions for a company to make a claim under the SME scheme is that the expenditure is not incurred by carrying out R&D as a subcontractor. If a ‘large company’ subcontracts its R&D to an SME, then the SME can make a tax credit claim, but only under a Large Company Scheme. Where successful, this will enable the company to get a 13% gross deduction for qualifying R&D expenses.

Generally, if a company has received a grant for a project, this will not prevent them from claiming R&D tax relief. They will however, only be able to apply for this under the Large Company Scheme.

This means that if your company has received a relatively small grant your company could potentially lose money overall, as some grants can significantly reduce what your company can claim in tax relief. The difference between what the company can claim under the Large Company Scheme and the potential claim under the SME Scheme could be much higher than the grant itself. This is why you should always seek professional advice when making an R&D tax credit claim.

(See also: R&D Grants)

You will need to complete a Full Company Tax Return (CT600) and not a Short Company Tax Return.

If you are an SME, you will need to use CT600 (2023) Version 3 and complete the following boxes:-

• Box 142 - you need to put a tick in this box.
• Box 650 - you need to put a tick in this box.
• Box 656- tick this box if you are claiming for accounting periods beginning on or after 1 April 2023 and you must separately complete the R&D claim notification form in some circumstances.
• Box 657- you need to put a tick in this box and separately complete the R&D Additional Information Form. The claim to R&D will be removed from the CT600 is the R&D Additional Information Form is not completed.
• Box 660 - you need to insert the total enhanced R&D tax relief. This is the original R&D expenditure plus the additional enhanced R&D tax relief.
• Box 875 will need to be completed.
• Box L168 (PAYE/NIC’s for which the company is liable in this accounting period) and L168A (Employer PAYE reference) on the CT600L form.

Common examples of software development projects that may qualify for R&D tax relief include:

• state-of-the-art software for new projects, or new functionality for existing R&D projects;
• tools to extend the functionality of application software programs or of an operating system;
• extensions to database software, programming languages, or operating systems;
• software development tools, such as tools to port data across platforms, tools for image processing or character recognition;
• novel data management techniques, such as new object representations and new data structures;
• innovative methods of capturing, transmitting, manipulating, and protecting data;
• software to run new computer hardware;
• software to run on devices with pre-installed operating systems, such as handheld GPS, mobile phones, and tablets; or,
• means of integrating hardware and software platforms.

Common examples of product and process development projects that may qualify for R&D tax relief include:

• innovative product development using computer-aided design tools;
• development of second generation or improved products;
• tooling and equipment fixture design and development;
• developing unique computer numerical control programs;
• designing innovative programmable logic controllers;
• designing innovative manufacturing equipment;
• prototyping and three-dimensional solid modelling;
• designing and developing cost-effective and innovative operational processes;
• integrating new materials to improve product performance and manufacturing processes;
• evaluating and determining the most efficient flow of material;
• designing and evaluating process alternatives;
• designing, constructing, and testing product prototypes;
• developing processes that would meet increasing regulatory requirements; or,
• streamlining manufacturing processes through automation.

HMRC works to process applications for R&D Tax Credits within 40 working days. However, the processing time required for HMRC to review and consider an R&D Tax Credit claim depends largely on the nature of the claim itself in addition to the complexity of a company’s structure and its accounting. Even the time of year can make a difference, with peak accounting times such as March and December being particularly busy and resulting in slower processing times.

You can claim relief on costs that have been expensed through the Profit & Loss account and in certain circumstances you can also claim capitalised expenditure (providing that the assets purchased have been classified as Intangible Assets).

The main areas of costs that can be claimed are:

• staff costs (Incl. gross pay, employer's NI, reimbursed expenses and employer's pension contributions);
• agency workers (externally provided workers);
• subcontractors/freelancers;
• software license costs;
• cloud computing costs, including storage, for accounting periods beginning on or after 1 April 2023;
• data licence costs, for accounting periods beginning on or after 1 April 2023;
• consumable items (heat, light and power, and materials and equipment used or transformed by the R&D process); and,
• payments to the subjects of clinical trials.

It is not uncommon for an R&D team to consist of many individuals from different parts of the business.

Your R&D project team may include the R&D Manager, a Lead Developer, Engineers, Project Co-ordinators, CAD Engineers, Quality Control and Testing specialists, and Cost Accountants, as well as members of the senior management team.

R&D Tax Credits for profit-making SMEs

The R&D tax relief would enable a profitable SME to reduce the amount of corporation tax they pay on profits for the period, by the amount of the enhanced deduction.

The current R&D tax credits rate results in a 21.5% benefit on R&D expenditure for profit-making SMEs. If the deduction is greater than the SME’s profit for the period, then this will create a loss for corporation tax purposes.

R&D Tax Credits for loss-making SMEs

Where the additional enhanced R&D deduction is greater than the SME’s taxable profit for the relevant accounting period then this creates a loss for corporation tax purposes.

The SME can then decide between the following options:

• carry back the loss to the previous accounting period (if there was a taxable profit);
• carry the loss forward and offset against future profits; or,
• surrender the loss (fully or partially) to HMRC in return for a payable R&D tax credit.

The company can surrender the lower of the enhanced R&D relief or the taxable losses for the period.

The losses are surrendered for a cash credit (tax credit payable) and the current rate is 10% (14.5% for R&D intensive companies). So as the enhanced R&D tax relief is 86% a cash credit can be worth as much as 18.6p for each £1 of eligible R&D expenditure.

The Research and Development Expenditure Credit was introduced on the 1st April 2013 and replaced the original Large Company scheme entirely on 1st April 2016.

The key difference between the RDEC and the Large Company scheme is that the RDEC allows a loss-making company to receive a payable tax credit.

The RDEC is a taxable receipt and it is paid net of tax to companies with no corporation tax liability. From 1st April 2023, the RDEC rate was increased from 13% to 20%. From 1 April 2023, the corporation tax rate has increased to 25% from 19% for companies making a profit in excess of £250,000. The benefit would therefore be 15% of the eligible R&D expenditure.

There are a couple of ways in which you can account for R&D tax credits, and these depend on whether the claim is made under the SME scheme or the RDEC scheme.

The SME R&D Tax credit does not form part of the company’s taxable income. Therefore, it will be shown as an adjustment to the company’s corporation tax charge in the income statement (i.e., a “below the line” adjustment).

This can be done either before finalising the statutory accounts for the year in which the claim is made or retrospectively by way of an over/under provision to the corporation tax charge.

The Research and Development Expenditure Credit (RDEC) works slightly differently in that the adjustment takes place “above the line” in the income statement. The RDEC forms part of the company’s income for corporation tax purposes. There are a few ways in which you can account for this and therefore the most appropriate method is best discussed with your accountant/auditor or R&D tax advisor.

Yes, we can. At Myriad we tailor our service and are led by our clients, adapting our approach to suit our client’s needs.

By working collaboratively with other advisors, the process becomes smoother and more efficient.

HMRC has increased the number inspectors in its R&D team and therefore enquires are becoming more common.

Myriad’s team of expert advisors will support you every step of the way. This is part of our full consultancy service and there are no hidden charges.

Research and Development for tax purposes takes place when a project seeks to achieve an advance in science or technology, through the resolution of scientific or technological uncertainties.

To advance science or technology you must be increasing the overall knowledge or capabilities in a particular field but just the company’s own knowledge or capability.

Even if a project seeks to achieve such an advance but this fails or is not fully achieved, R&D still has taken place.

To be classed as an SME you must have fewer than 500 employees and either a turnover of no more than €100m or gross assets of no more than €86m.

If you breach the turnover and balance sheet thresholds but have less than 500 employees you will also be classed as a large company for R&D tax purposes.

When assessing whether your company’s meets this criteria, other group and connected enterprises must also be considered.

Acquisitions, takeovers and mergers can also impact a company’s SME status.

This can be complicated and therefore always speak to a specialist advisor to ensure your claim is made under the correct scheme.

R&D tax credits are a form of Corporation Tax relief and so, as a Limited Liability Partnership (LLP), you cannot usually claim as you are not registered for UK corporation tax.

However, if your LLP has a corporate member and they are subject to corporation tax on their share of profits from the LLP then they may be able to benefit from R&D tax relief on R&D activity carried out by the LLP.

HMRC will offset any payable SME R&D tax credit and RDEC against outstanding liabilities for Corporation Tax, VAT, PAYE and NIC before making a repayment to you.

This will happen unless the tax liability has been formally deferred.

Claims for R&D Tax relief are made via the Company Tax Return (CT600).

Prior to the submission of the CT600, you must submit an R&D Additional Information Form with details for the R&D project and costs.

Additionally, for accounting periods beginning on or after 1 April 2023 you must complete the R&D claim notification form in some circumstances.

HMRC would expect that someone who is being described as a competent professional to be knowledgeable about the relevant scientific and technological principles involved, be aware of the current state of knowledge, and have accumulated experience and be recognised as having a successful track record.

This person is likely to be a lead developer or engineer. This person will be best placed to asses which of your projects will count as R&D and to provide the relevant details to enable technical reports to be written.

Choosing the right advisor is an important decision, a good working relationship with your advisor will ensure your claims are delivered efficiently, are robust and defensible and are maximised in value.

If you are looking to change advisors, first check your contract, there may be clauses which tie you in for multiple years which carry fees if you terminate. If your current contract contains so such clause or has expired then switching is easy, simply tell your old advisor that you no longer wish to use their services and select a new advisor. At Myriad we make this transition easy exchanging the relevant information promptly to ensure a smooth handover.

Yes, assuming qualifying activities are being undertaken. Payments to subcontractors can be included.

You can claim up to 65% of the qualifying costs if the third party is not connected to your company.

The work you have subcontracted out need not be classified as R&D in its own right but should form part of a larger project that is considered to be R&D.

Currently there is no requirement for the subcontractors to be UK resident or carry out the work in the UK however for accounting periods starting on or after 1st April 2024 this will change.

The government intends to limit relief for subcontracted activities to those that take place in the UK only. This will apply to Externally Provided Workers (agency workers) as well. There will be some very narrow exceptions to this and therefore please speak to an advisor as soon as possible to find out how these rule changes will affect your claim.

For claims made under the RDEC scheme, subcontractors must be individuals or qualifying bodies to be eligible, i.e. not Limited Companies.

R&D starts when work to resolve the scientific or technological uncertainties start and it ends when these uncertainties are resolved or work to resolve them ceases (the “R&D Project Period”).

The R&D Project Period may start or end during an accounting period and therefore staff time on each R&D project will need to be apportioned accordingly.

Our experts will help you determine the R&D boundaries of your project, identify the elements of R&D within commercial projects and advise you how to present these to HMRC.

Calculating an accurate apportionment of staff time spent working on qualifying activities within the R&D project will depend on the nature of the work done and the records that you have in place.

Staff joining of leaving the company during the year will need to be considered and also whether staff are working full or part time hours.

Staff job roles will also need to be separated into those roles which are directly contributing activities and those which are indirectly supporting activities.

Our advice is to keep and maintain contemporaneous time-keeping systems however formal timesheet system is not always necessary.

If there are no time recording records in place staff time will need to be allocated on a just and reasonable basis.

Record-keeping is an important part of making a claim for R&D tax relief and although there is no specific requirement set by HMRC although they do expect to see some form of records.

HMRC do accept that for first time claimants or claimants in their first 3 years are unlikely to have detailed records in place to support all of their R&D. Meeting notes, planning materials and workflow tracking are all good examples of what records can be kept to support your claims.

Our advisors can work with you to create bespoke methodologies and record keeping that is appropriate for your business.

Yes, Companies will need to inform HMRC, in advance, that they plan to make a claim. They will need to do this, using a digital service, within 6 months of the end of the period to which the claim relates.

Speak to an advisor as soon as possible to determine whether you are eligible and ensure your pre-notification is made within the timeframe.