Research & Development tax relief – what is available and when can you claim?

28th November 2023

What is R&D Tax?

The United Kingdom has a generous Research & Development (R&D) regime for small and medium sized companies (SME), so if your company carries out any work on innovative projects then it may qualify to take advantage of the reliefs available.

Under the current legislation for every £1,000 an SME spends on qualifying R&D it can claim a tax deduction as if it had spent £1,860. For expenditure prior to 1 April 2023 the deduction would have been even greater at £2,300. It is even possible to claim a tax refund!

An SME is defined as a company with fewer than 500 members of staff and either turnover of under €100 million or a balance sheet total under €86 million and so the vast majority of companies in the UK would qualify.

There are various other conditions and restrictions that would need to be considered, as would be expected for such a generous tax relief and we can advise in detail on these but if your company meets the SME test it is absolutely worth an initial conversation.

The restrictions do include companies receiving certain types of grants and state aid and so it is often worth having the initial conversation with us even before the company does anything, as the R&D claim can sometimes be more generous than claiming a grant.

The recent Autumn Statement has introduced changes to the R&D regime which will come in to force for expenditure incurred on or after 1 April 2024 and we will be able to provide an update of those changes in due course. In the meantime the following is still applicable until that date.

What can be claimed?

The SME has a number of options available to it as regards the R&D expenditure which can be summarised as follows:

1. It can claim an extra deduction against its profits – For a company paying corporation tax at 19% the extra deduction of £860 on each £1,000 of costs will reduce the tax liability by an extra £163.40. For a 25% tax paying company, the additional deduction will be worth £215.
2. If your company is making taxable losses it can increase those losses – Additional R&D deduction will increase tax losses which can then be carried forward to offset against future taxable profits or it can even be carried back 12 months to offset against the previous year’s profits (if any exist) to obtain a corporation tax refund.
3. If your company has made a taxable loss after the R&D claim – Instead of carrying losses forward or back you can surrender the losses in exchange for a refund based on 10% of the amount surrendered.

What costs will qualify for R&D tax relief?

For company expenditure to qualify for the R&D tax relief, it will need to meet certain criteria to show that the project has achieved “an advance in science or technology”. The project must also be related to your company’s trade, either as an existing one or one that you intend to start up when hopefully the R&D proves successful.

The costs must directly relate to the R&D project and can include any of the following:

1. Staff costs including wages and salaries, pension contributions and employer NIC contributions. This is often the main category of expenditure. You can also claim for certain admin staff in certain cases if they are directly supporting the project.
2. Consumable items including fuel, materials, power and water.
3. Subcontractor costs or externally provided workers. 100% of the costs can be claimed if your company and the organisation providing the staff or the subcontractor are connected, or 65% may be claimed if you are not connected.
4. For R&D projects in the pharmaceutical industry, you may claim for payments made to the subjects of clinical trials.
5. Software costs in respect of licence fees for R&D and a reasonable share of the costs for software partly used in your R&D project, data licence and cloud computing (including data storage, hardware facilities, operating systems and software platforms).

There are certain types of costs that cannot be claimed such as capital expenditure, although other types of allowance are often available for these.

What do you need to do in order to make a claim for R&D?

For accounting periods commencing on or after 1 April 2023, you must submit a form to HMRC in advance of your claim if you are claiming for the first time or if your last claim was made more than 3 years ago. This form needs to be submitted within 6 months of the end of your accounting period. We can of course help with this. For earlier periods this notification procedure above is not relevant and a claim can simply be made when submitting the Corporation Tax Return. You will however need to send details of the project when the claim is made.

How to claim R&D tax relief?

The details of the project that you will need to submit to HMRC will deal with the following five key questions:

1. In what area was the project aimed; science or technology?
2. What was the level of knowledge before your project?
3. What advance did the company’s project hope to achieve?
4. What problems and uncertainties did the company face?
5. How did your project seek to overcome these uncertainties?

The R&D regime can provide your company with attractive corporation tax reliefs and cashflow benefits and we at Thompson Jenner can help deal with the requirements to maximise the chance of success with your help. We have many years of supporting our clients with R&D claims so have the knowledge and expertise to guide you through the process from start to finish. Should you wish to find out more about the scheme or wish us to help you with a claim, please do not hesitate to contact one of our partners who will be more than happy to help!