Does your company contribute to the UK’s science or technology sectors? If so, then it’s vital that you access the correct tax reliefs to sustain this. The landscape of the UK’s research and development (R&D) system is constantly evolving to keep up with the needs of those investing in specific projects, whilst also protecting it from misuse. In fact, the last year alone has seen several changes to the system.
What counts as a ‘research and development’ project?
HMRC outlines that the work you claim R&D tax relief for; ‘must be part of a scientific project to make an advance in science or technology’. If the advance is in the arts, humanities or social sciences (including economics), then you cannot claim relief.
Further to this, the project must be related to your company’s trade, whether that is an existing company, or one that you plan to start based on the results of the project.
You need to be able to explain how your project:
- looked for an advance in the field
- had to overcome a scientific or technological uncertainty
- tried to overcome this scientific or technological uncertainty; and
- could not easily be worked out by a professional in the field.
A changing landscape
At the Spring Budget in March 2023, the government announced several changes to R&D relief, as part of their £1.8bn support package for development and investment in the UK’s tech-pioneering companies.
There are currently two different types of R&D tax relief for qualifying expenditure, and both have different clauses for eligibility:
Small and medium-sized enterprise (SME) R&D tax relief can be claimed by SMEs that have less than 500 staff and a turnover under €100 million or balance sheet under €86 million. You must be able to show how your project meets the definition of R&D outlined above.
If you qualify, the SME R&D tax relief allows you to deduct 186% of your qualifying costs from your company’s yearly profit (an extra 86% on top of the standard 100% deduction). Furthermore, if you have claimed a relief and made a loss, then you are able to claim a payable tax credit worth up to 10% of the surrenderable loss.
An additional tax relief for ‘R&D intensive’ SMEs was also introduced from 1st April 2023. This enhanced relief allows loss-making R&D intensive SMEs with R&D expenditure constituting at least 40% of their total expenditure to claim a higher payable credit rate of 14.5%.
R&D expenditure credit (RDEC) can be claimed by large companies working on R&D projects. If you are an SME that has been subcontracted to do this work by a large company, then you may also be able to claim RDEC.
The expenditure credit that your company is entitled to is calculated as a percentage of your qualifying R&D expenditure. For expenditure incurred from 1 April 2023, the rate for RDEC is 20%.
Identifying fraudulent claims
Did you know that in the 2020/21 year alone, HMRC identified more than £1.1 billion of losses to R&D error and fraud? Innovation through research and development is integral to the UK’s economy, and HMRC’s tax relief schemes are key to making sure companies can sustain their contribution. However, the schemes are vulnerable to abuse from companies taking advantage of the attractive relief schemes.
In a Corporate Report published in July 2023, HMRC introduced the following measures to begin tackling compliance issues within the sector:
- A requirement to submit all R&D claims digitally, so that HMRC can efficiently carry out risk assessment.
- A requirement for companies to submit an additional information form for each claim, to make it easier for HMRC to identify and target higher-risk claims.
- A requirement for each claim to be supported by a named officer of the company, to reduce claims being submitted without the company’s knowledge or understanding.
- A requirement to disclose the details of any agent associated with a claim enabling HMRC to move quickly to intercept agent misconduct.
- Where an agent has been caught facilitating fraudulent claims, they will be limited from filing unnecessary claims for the same company for earlier years.
- Reaching out to customers who are new to R&D regimes and to those in sectors where there are limited opportunities for businesses to make claims.
The report explained how the new policies have been designed to protect taxpayer money as well as the integrity of R&D relief schemes. This goes alongside increased scrutiny from HMRC’s R&D tax inspectors, who are thought to be investigating 1:25 claims, compared to what was previously 1 in 600.
Make sure to claim what you are entitled to but in line with HMRC’s guidance
Does your company carry out research and development-related projects? It’s essential that you submit your R&D claim correctly to avoid unnecessary enquiries and receive the correct relief for your expenditure. At mgr, we aim to ensure our clients receive the R&D relief that they are entitled to. So, if you think your company may have qualifying expenditure, please do not hesitate to get in touch with us so that we can guide you through the claim process.