R&D Tax Credits

The UK Government’s Research & Development (R&D) Tax Credit Scheme has been in place since 2000 in order to incentivise businesses to invest in projects focused on innovation.

This scheme has enabled over 89,000 Limited Companies across the country to receive a total of £6.6bn in tax relief during the last year alone. The scheme is open to Limited Companies only, whereas sole traders and partnerships are not included. When claiming R&D Tax Credits, businesses can receive either a reduction in their tax bill or cash credits for loss-making companies.

R&D tax relief can provide a number of significant tax benefits for businesses. These include reducing taxable profits, creating losses where none existed previously, or increasing pre-existing losses.

There have been significant changes to the R&D Tax Relief regime over the last year, impacting accounting periods commencing on or after April 1st, 2023, with additional modifications taking effect from April 1st, 2024.

Summary

Change in the rates of reliefs for the SME R&D scheme from April 2023

Change in the rates of reliefs for  RDEC from April 2023

From 1st April 2024 – Introduction of R&D Intensive SME Scheme

From 1st April 2024 – Introduction of merged R&D scheme

From 8th August 2023 – Introduction of the Additional Information Form (AIF) – mandatory compliance form completion

Claim ‘signed off’ by a named officer of the company

Claims must include details of any associated agents

Claims rejected if not completed properly.

Claimaints must submit a pre-notification of their claim, if companies are new claimants or have not claimed in the previous 3 accounting periods

First-time relief-claiming businesses (or businesses who have not claimed in the last three financial periods) must submit a pre-notification of their claim to HMRC online. This gives HMRC the opportunity to take proactive steps in educating companies on valid R&D processes and also provides extra safeguards against reliefs being illegally claimed

The exclusion of overseas expenditure. Overseas costs for externally provided workers (EPWs), subcontractors and contributions to independent R&D (e.g., payments to universities) will no longer be eligible for claiming R&D, except where it is wholly unreasonable to replicate the conditions in the UK

R&D relief payments will now go directly to claimants, rather than a third party (such as an R&D Tax Credit service provider).

The benefit will be ‘above the line’ under the merged scheme, which means like RDEC it will be seen as taxable income

Small and Medium-sized Enterprises (SMEs) are defined as companies with fewer than 500 FTE employees and either total revenues lower than €100 million or total balance sheet assets lower than €86 million. SMEs have access to the Small Business Rate Relief Scheme, which offers tax relief at a rate of up to 230%. Loss-making SMEs can also surrender losses to HMRC for a cash credit.

Large companies are generally defined as companies with 500 or more FTE employees, or those which have fewer than 500 employees but revenue in excess of €100 million and balance sheet assets greater than €86 million. If SMEs meet certain conditions, they may have to claim under the RDEC scheme.

The Research and Development Expenditure Credit (RDEC) scheme was introduced in 2013 and provides Large Companies and SMEs forced to claim under RDEC, a payable cash sum, if they are loss-making or an offset of tax payable if they are profitable. This replaced the Large Company Scheme from 1st April 2016. For expenditure from 1st April 2023, the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%.