The R&D Tax Relief Guide for UK Businesses
R&D tax relief can be a valuable funding source for UK businesses. However many businesses are unaware that they qualify for R&D relief, and some businesses that do submit claims are doing so incorrectly due to poor guidance.
In this guide we’ll outline the key elements of the scheme so you know how to correctly utilize the scheme. And if you'd like to go more in-depth on R&D tax credits, check out our webinar replay on the topic here.
You better strap in because it’s going to get detailed!
UK R&D tax relief schemes started in 2000 to help the UK economy grow. The theory was that giving tax relief to innovative companies would help them generate a positive return for the UK economy. Government economists have calculated that for every £1 of R&D relief, the UK economy benefits by up to £2.15.
Last year over 60,000 businesses claimed R&D tax relief in the UK, worth a collective £5bn pounds. The average claim was worth £57,000 under the SME (small-medium enterprise) scheme and £332,000 under the RDEC (research devolvement expenditure credit) scheme.
1. Qualification criteria
A business needs to meet the following five criteria to qualify for R&D relief. If it fails to meet all of these, it won’t be eligible.
Prepare UK Corporation tax returns
The Business must be subject to UK corporation tax. The vast majority of UK limited companies meet these criteria automatically. If a business is incorporated outside the UK, it can either set up a UK subsidiary or create a permanent establishment in the UK.
Attempt to make a scientific/technical advance
Although this sounds like quite a high barrier, the UK government wants R&D relief to apply to an extensive range of businesses and therefore has provided generous leeway with what this actually means. Specifically:
An advance must be sought. But an advance does not have to be a world first. Instead, a business needs to attempt an advance that is not in the public domain. One of the ways you can tell if something is in the public domain is with a simple Google search.
It could be scientific in nature. The definition of science is broad in this context and includes systematic studies of almost any subject. It currently excludes work in the arts, pure maths, humanities and social sciences, including economics. A systematic study of something as simple as a pricing model for clients could theoretically be included if it meets the other criteria.
Or it could be technological in nature. This includes creating any sort of technology, adapting existing technology, combining two bits of technology or replacing a manual process with technology in an improved way.
The outcome of the advance must be uncertain
Uncertainty exists in two main types for R&D claim purposes:
Technical - It may not yet be technically feasible to achieve something, e.g. sending astronauts to Mars.
Practical - It may not be practical to achieve something with limited resources, e.g. creating a rocket that takes tourists to the moon for under £1m a journey.
Taking actions to resolve uncertainties
Businesses need to take actions to resolve uncertainties to qualify for R&D relief, such as building or testing something. Organisations that fail to make the advance they sought can still qualify for R&D relief. It’s usually easier to prove that a project meets the R&D relief if it fails!
Difficult for others to solve the uncertainties
It must be difficult for ‘competent professionals’ (those with skills or experience in the field to solve the uncertainties. In reality, this could mean that:
Other competent professionals have attempted to make the advance and failed. The people in your business have specialist skills and experience that go beyond the average professional.
2. SME or RDEC?
If a business meets the five qualifying criteria above, they could qualify for the SME scheme, RDEC scheme or both. The main differences between the schemes are:
3. What qualifies for R&D relief
Only certain costs qualify for R&D relief as set out below:
This is normally the largest cost category that qualifies for R&D relief. Most businesses can claim all payroll expenses including employer’s national insurance and pension contributions. However, dividend payments don’t qualify. Staff don’t have to be located in the UK to qualify, however they do have to be expensed to the P&L of the claiming company.
For most staff members, only a portion of their time is spent on R&D activities. These broadly consist of:
a) Direct R&D costs - time spent resolving technical uncertainty such as programming or in-house testing. This does not include non-technical scoping exercises, user testing or cosmetic refinements.
b) Indirect R&D activities
Contractor costs also qualify for R&D relief. Unlike full-time members of staff, only direct R&D activities can be claimed as R&D relief.
Additionally, qualifying costs and subcontractors are usually restricted by 35%. For example, if a company pays a contractor £1,000 to undertake some R&D, only £650 qualifies.
Finally, contractors working as individuals rather than through limited companies may not qualify for R&D relief. Specifically, if a contractor is essentially working as an employee, e.g. has regular work, company email address and uses company equipment, they cannot qualify for R&D relief.
3. Other costs
There are several other costs that qualify for R&D relief:
4. When and how to claim
1. Accounting periods
You can claim R&D relief on your business’s UK company tax return. This is usually the same period as your business’s accounting period. Organisations sometimes shorten or lengthen their accounting periods to speed up their R&D claims.
2. Submission details
Theoretically, all a business has to do is state the qualifying amount of R&D expenses on the tax return. But to avoid HMRC opening an inquiry, it’s best practice to produce an R&D report supporting the claim.
The R&D report should cover both the technical and financial aspects of the R&D activities. In general, the larger the claim, the more details you should provide.
3. HMRC payment times
At the time of writing, HMRC is processing all R&D relief claims within 28 days of submission. If a business is due a tax refund, HMRC will either pay directly to a bank account or issue a cheque.
HMRC may offset an R&D claim against other taxes due (such as PAYE).
5. When to use a specialist
Making R&D relief claims is unlike most other tax reliefs as theirs because there’s both financial and scientific/technical aspects. To produce a high quality R&D report requires a close collaboration between both aspects and a good understanding of the R&D rules.
If you’re conducting R&D and you think your claim size is under a few thousand pounds, it's not unusual to make a claim without specialist support.
However for larger claims or to make sure you’re getting the maximum relief you’re entitled to, I recommend getting a specialist involved. The specialist will dig deep into your financials, checking for problems and opportunities to ensure the claim goes through without a hitch.
The R&D scheme is a fantastic incentive, and I hope this guide encourages you to explore it further. If you have more questions, or would like a brief assessment of whether your company qualifies, contact me and I will be happy to help.
Ben Adams is a chartered accountant and tax specialist, working as CFO and Claims Director at Claimer. Starting his finance career in the tax team at Mazars, he qualified as a chartered accountant and then became Operations Director at Ask The Boss, an accountancy and outsourced CFO provider.