R&D tax relief the benefits it can bring to your business

In today’s highly competitive markets, businesses are innovating faster than ever. From streamlining processes and boosting efficiency to launching new products, innovation plays a critical role in staying ahead of the competition and driving business growth.

Since its inception 20 years ago, the government has remained committed to providing and evolving the research and development tax scheme to support business growth and reward companies that invest in innovation. The government also benefits more broadly because innovation drives economic growth and productivity.

Research and Development (R&D) tax relief is a corporate tax relief that can provide valuable financial support and financial benefits, either by way of reducing your company’s tax liability or providing a payable tax credit. This valuable incentive applies to UK businesses only.

Depending on your business’s size and profitability, you could recover up to 27% of eligible R&D costs for qualifying projects. This relief helps ease the financial pressure of developing new products and processes, freeing up funds to support ongoing and future innovation.

In April 2024, following an extensive consultation period, the Government overhauled the UK’s Research and Development tax regime in an attempt to simplify the system and reduce fraud. The aim was to simplify the system and tackle fraud by replacing the separate SME scheme and RDEC scheme with a single, merged framework. The new approach provides clearer rules around contracted-out R&D, ensuring relief is awarded to the company taking on the risk, while also offering enhanced support for R&D-intensive SMEs.

To follow is an overview of what you need to know about R&D tax credits, and how you can secure the relief, based on the latest guidance from HM Revenue and Customs (HMRC).

What are Research and Development (R&D) tax credits?

R&D tax credits are a government-led tax incentive that aims to encourage and reward UK companies investing in innovation that drives scientific or technological advancement and reduces scientific or technological uncertainty. These activities are not just limited to scientific, medical or technical sectors; they include architecture, manufacturing, agriculture and many more industries.

Essentially, R&D tax credits provide a form of tax relief or cash reimbursement to companies that invest in qualifying research and development activities. The incentive can be a valuable source of funding for businesses to accelerate R&D initiatives, pursue innovative projects, hire new staff and ultimately become more competitive and sustain long-term growth.

If your business is driving innovation, you could be entitled to claim this relief, resulting in a cash payment, a reduction in Corporation Tax, or a combination of both.

Understanding whether your project qualifies is key. HM Revenue and Customs (HMRC) provide guidance to help businesses determine what counts as R&D for tax purposes. For accounting periods starting on or after 1 April 2024, claims fall under the new merged scheme, while earlier periods are assessed under different rules depending on the size of the business.

Qualifying criteria for claiming R&D tax relief

For tax purposes, R&D typically refers to work carried out as part of a project that aims to advance science or technology. To qualify, the activity must help resolve scientific or technological uncertainty. In other words, it should involve solving problems where the outcome isn’t already known.

Essentially, your research and development activity should result in the creation of one of the following:

• A new product
• An improved product
• A new process
• A new piece of software

Some supporting activities connected to the project may also qualify for R&D tax relief. However, work that doesn’t directly support the resolution of these uncertainties, and isn’t classed as a qualifying indirect activity, will not be considered R&D.

The rules relating to activity that qualifies for R&D are set out in the Department for Science, Innovation and Technology (DSIT) guidelines. HMRC also publishes Guidelines for Compliance, which set out the types of evidence you will need to give in your claim to prove your business is carrying out qualifying research and development activity.

Qualifying research and development expenditure

Research and development tax relief is only available for certain qualifying costs. The expenditure must be revenue and not capital in nature and must be directly attributable to R&D activities undertaken either by the business itself or to an entity contracted out by the business.

R&D tax relief applies to specific research and development project related costs set out in government guidelines that were updated in March 2023. Qualifying expenditure includes:

• Staff cost
• The costs of externally provided workers (EPWs)
• Software
• Data licences
• Cloud computing services
• Payments to subjects on clinical trials
• Consumable or transferable materials
• Certain payment for contracted out R&D

In the updated guidelines, pure mathematics was included for the first time within the definition of R&D for tax purposes for accounting periods beginning on or after 1 April 2024.

In respect of staffing costs and the cost of EPWs, the relevant individuals must be directly and actively engaged in the research and development activity.

Organisations ineligible for R&D tax relief

Within the research and development rules, certain entities do not qualify for research and development tax relief; these include: NHS bodies, scientific research organisations, charities, higher education institutions, UK universities and certain overseas bodies.

Key features of the current R&D scheme

The points below apply to R&D claims under the new scheme introduced in April 2024.

R&D tax credits do not prevent businesses from accessing other forms of financial assistance, such as UK government grants and subsidies.

What is Enhanced Relief for R&D intensive SMEs?

Introduced on 1 April 2024 as part of the government changes to the research and development tax regime, Enhanced Relief for R&D-intensive SMEs is an alternative tax relief that provides an additional tax deduction of 186% on qualifying R&D expenditure. The deduction operates to reduce an SME’s taxable profits.

A repayable cash credit at a rate of 14.5% of surrenderable losses may also be available.

Broadly, an SME will be research intensive, where 30% of its total expenditure is on qualifying R&D. The enhanced tax relief for research intensive SMEs has been available since April 2023, although the research intensity threshold was reduced from 40% from 1 April 2024.

Restrictions relating to contracted out R&D

It is not uncommon for companies involved in complex research and development projects to outsource part of that R&D activity to another party that perhaps has better expertise and equipment to undertake the research and development more effectively. Under the previous R&D regime, tax relief for contracted-out R&D costs was very limited and applied mostly to SMEs.

Under the changes announced in the Autumn Budget in 2023 and introduced for accounting periods starting on or after 1 April 2024, tax relief may be available for contracted-out R&D where various criteria are met.

It is also worth noting that where a group company subcontracts R&D to another group company, the companies can make a joint election to enable the entity carrying out the R&D activity to claim the relief. This must be done in writing either before or at the same time any claim is prepared.

Overseas restrictions relating to R&D

Before April 2024, there was no requirement for R&D activities to be carried out in the UK in order to qualify for tax relief. Under the new scheme, this has changed. To better support UK-based innovation, a territorial restriction has been introduced that limits tax relief for R&D conducted overseas.

In most cases, where R&D work is subcontracted, tax relief will now only be available if that activity is carried out in the UK. When assessing where the R&D takes place, HMRC focuses on the location of the activity itself, not where consumables, data, or software are sourced.

There are some exemptions to the overseas restrictions, both for R&D expenditure and for the use of EPWs. These are complex and exceptional, and best dealt with by seeking expert advice.

R&D tax relief claims and procedures

The R&D tax relief claim submission protocols were amended in 2023 and came into effect for accounting periods starting on or after 1 in April 2024. For companies with accounting periods beginning on or after 1 April 2024, businesses are required to submit a claim notification to HMRC advising it of the intention to claim R&D tax relief.

This notification requires some basic information on the planned R&D activities and must be submitted between the start of the period of account and sex months after the ned of the period of account.

An Additional Information Form (AIF) containing detailed information supporting the R&D claim is required for all claims submitted on or after 1 August 2023. This form must be submitted before or at the same time the claim is submitted.

If the claim notification or AIF requirements are not met, HMRC has the power to amend a company’s tax return and remove any R&D claim.

Time frame for submitting an R&D claim

Businesses can submit R&D claims retrospectively. You have up to two years after the end of the accounting period in which the R&D costs occurred to make a submission, by amending past company tax returns (CT600). This window allows claims for multiple prior years, but you must act before the two-year deadline passes, as missing it generally closes the opportunity for that period.

How submission windows work

• Standard window: For a financial year ending, say, March 31, 2023, you have until March 31, 2025, to submit or amend your CT600 to include the R&D claim.
• Amending tax returns: If you’ve already filed your return but missed the claim, you can amend it to claim the credit, which can result in a tax saving or a cash rebate.
• Loss-making companies: If your company made a loss, you might be able to carry back the R&D enhanced loss to a profitable prior year or receive a cash credit.

Key Considerations

Deadline is Strict: The two-year limit from the accounting period’s end is the primary rule; missing it usually means you can’t claim for that year.

Late Claims: HMRC may consider late claims if there are exceptional reasons, like genuine unawareness, but these are handled on a case-by-case basis.

Documentation is Key: You’ll need to provide detailed information about the scientific or technological challenges your R&D addressed, explaining the uncertainties and how you sought to overcome them.

Maximising R&D tax relief

While R&D tax credits offer significant advantages, maximising the benefits requires careful planning. Here are some tips for optimising your R&D tax claims:

• Document everything: keeping detailed records of R&D activities and expenditures is crucial for substantiating tax credit claims. Clear documentation not only simplifies the claim process but also ensures compliance with regulatory requirements.
• Stay informed: tax laws and regulations surrounding R&D tax credits are periodically reviewed. Staying abreast of updates and amendments to these regulations can help businesses capitalise on new opportunities and navigate potential pitfalls.
• Seek professional advice: navigating the complexities of R&D tax credit claims can be challenging, particularly for small businesses or those with limited internal resources. Seeking guidance from tax professionals like dns, can help you manage your tax liability, ensuring your tax compliance and helping you avoid an HMRC enquiry.

Summary

R&D tax relief is all about encouraging innovation and technological advancement and supporting UK businesses that engage in this activity. Following the changes introduced to the R&D tax relief regime in 2024, some businesses have reconsidered the value of pursuing an R&D claim. Innovative SMEs should not be deterred from claiming R&D tax relief, as it remains a vital source of funding for ongoing innovation. For loss-making SMEs who meet the threshold for Enhanced R&D Intensive Support (ERIS) this tax relief is a vital life-line.

Research and Development Tax Credits can reduce your tax liability, transform your business, help you stay competitive, and open new opportunities to increase productivity and grow your revenue. Innovation can also be a key part of your business’s ESG commitments, driving significant environmental and social change that can have a positive impact on a global scale.

At dns we’ve supported numerous businesses across varying sectors in claiming R&D tax relief. Our team of experts are here to help you through the process of claiming R&D tax relief. We’ll help you understand whether you business qualifies, our experts will collate all the information required, prepare your claim, and deal with HMRC on the processing of your claim.

If you think you may qualify for R&D tax relief or need support in preparing a new claim, call our team at dns on 03300 88 66 86 or email us at [email protected]. We’ll help you move forward confidently and support you with your R&D claim from start to finish.

About the author

Gary Zouvani
I am a qualified chartered management accountant with over 25 years’ experience working in industry and accountancy practise. Currently DNS group operations director I manage over 50 employees as well as head up our accountancy franchise proposition.