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 a business can claim for R&D tax relief going back two accounting years. The claim can be made in a company tax return or an amendment.

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 say to 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.

It’s well worth discussing this with our team before you decide.

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

When you claim R&D tax relief, one of the HMRC's R&D specialist units will review and process it. It is standard 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 make 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 outlining the technical advancement and uncertainties and providing a detailed breakdown of the eligible R&D costs.

Under the SME scheme, R&D expenditure cannot have been incurred by undertaking R&D as a subcontractor.

If a ‘large company’ subcontracts its R&D to an SME, the SME can make a tax credit claim, but only using the larger company scheme (RDEC).

Where successful, this will entitle the company to a 25% deduction for eligible R&D expenditure. Where the SME claims under the Large Company Scheme, losses arising from that expenditure cannot be surrendered for a payable tax credit.

Where a company has received a grant to fund an R&D project, it can only receive R&D Tax Credits using RDEC. State aid prevents the company from using the SME scheme regardless of size. If your company has received a relatively small grant, it could lose money overall. So it’s always worth working out the best option for your company.

(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 R&D claim will be removed from the CT600 if 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 assessing process alternatives.
• Designing, constructing, and testing product prototypes.
• Developing processes that would meet increasing regulatory requirements.
• 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 mainly on the nature of the claim and the complexity of a company’s structure and accounting. Even the time of year can make a difference, with peak accounting times such as March and December being particularly busy, resulting in slower processing times.

You can claim relief on costs that have been expensed through the Profit & Loss account. 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 (Including 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 corporation tax they pay on profits for the period by the amount of the enhanced deduction.

The current R&D tax credit 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, 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 1 April 2013 and replaced the original Large Company scheme entirely on 1 April 2016.

The critical 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 1 April 2023, the RDEC rate was increased from 13% to 20%. From 1 April 2023, the corporation tax rate has risen to 25% from 19% for companies making a profit of over £250,000. The benefit would, therefore, be 15% of the eligible R&D expenditure.

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

The SME R&D Tax credit is not 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 before finalising the statutory accounts for the year 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 because the adjustment occurs “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 to account for this; 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, who adapt our approach to suit their 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.

To be classified 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 classified as a large company for R&D tax purposes.

Other groups and connected enterprises must also be considered when assessing whether your company meets this criterion.

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

This can be complicated; 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. 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 repaying 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).

Before submitting the CT600, you must submit an R&D Additional Information Form detailing 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 someone described as a competent professional to be knowledgeable about the relevant scientific and technological principles involved, aware of the current state of knowledge, 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 assess 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, and 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 that tie you in for multiple years and carry fees if you terminate. If your current contract doesn't contain such a clause or has expired, then switching is easy; 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 considered to be R&D.

Currently, there is no requirement for the subcontractors to be UK residents 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, so 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 starts and 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, so 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 on 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 or leaving the company during the year must consider whether staff are working full or part-time hours.

Staff job roles will also need to be separated into those roles that directly contribute to activities and indirectly support activities.

We advise keeping and maintaining contemporaneous time-keeping systems; however, a formal timesheet system is not always necessary.

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

Record-keeping is an essential part of claiming R&D tax relief, and although HMRC sets no specific requirement, they expect to see some form of record.

HMRC accept that first-time claimants or claimants in their first three 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 excellent examples of what documents can be kept to support your claims.

Our advisors can work with you to create bespoke methodologies and appropriate record-keeping 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 six 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.