Understanding R&D Tax Relief: A Summary for UK Businesses

In the ever-evolving business landscape, Research and Development (R&D) Tax Relief has become crucial financial support for innovative companies.

Arjun Kumar
Arjun Kumar
Dec 18, 2023

Understanding R&D Tax Relief: A Summary for UK Businesses

In the ever-evolving business landscape, Research and Development (R&D) Tax Relief has become crucial financial support for innovative companies.\ The Autumn Statement 2023 brought significant updates to the available schemes making it even more of a minefield to navigate. In this article, we're summarising what R&D tax is, whether it applies to your business, recent changes to the schemes and how you could benefit from it.

If you're a business embarking on the path of innovation and growth, this one's for you.

What is R&D Tax Relief? 

Let's start with the relatively simple stuff -- what even is R&D tax relief?

R&D tax relief is a government incentive designed to encourage UK companies to invest in innovation. When applying for R&D tax relief, there are many cash and non-cash benefits that you can receive. These include:

  • Corporation tax reduction

  • Losses to offset future corporation tax

  • Corporation tax refund

  • Cash

These strategies are particularly beneficial for start-ups and scale-ups that invest heavily in developing new products, processes or services.

Am I Eligible to Receive R&D Tax Relief? 

Not every business venture qualifies for R&D tax relief. Companies that spend money developing new products, processes or services or enhancing existing ones are usually eligible for R&D tax relief.

Activities that you can typically claim for involve resolving scientific or technological uncertainties. You must also:

  • Be a limited company in the UK, subject to Corporation Tax

  • Have carried out qualifying research and development activities

  • Have incurred eligible costs on these activities

How Much R&D Tax Relief Can I Claim? 

Without the support of an R&D expert, knowing what you can claim can feel like a grey area, particularly with the updates from the recent Autumn Statement 2023.\ Eligible costs for R&D tax relief include:

  • Staff costs: Wages, salaries and other related costs

  • Subcontractor and freelance costs: If they are directly associated with R&D activities

  • Materials and consumables: Used up or transformed during the R&D process

  • Software: Used directly in research and development

  • Utilities: Power, water and fuel used in R&D activities

However, it's important to be aware that HMRC has made changes to how much you can claim from R&D tax relief to tackle fraudulent behaviour. Find out more below:

R&D Tax: Autumn Statement 2023 

The Autumn Statement 2023 includes significant updates to the UK's R&D tax relief schemes, aimed at simplification and improvement. To summarise:

  • Merged R&D scheme: A new, merged R&D tax incentive scheme will be introduced, effective for accounting periods starting on or after April 1, 2024. This scheme will provide an above-the-line credit with relief at the current RDEC rate of 20%. This means a business will receive a 16.2% net benefit if you're loss-making and 15% if you're profit-making. The change is designed to streamline the process by having a single set of qualifying rules, reducing the complexity associated with claiming R&D tax reliefs.

  • Contracted-out R&D: Clear guidelines have been provided on claiming contracted-out R&D spend. These changes ensure the company making the R&D decisions and bearing the risks can claim the relief, aligning the incentives with actual innovation drivers.

  • Changes to subsidised expenditure rules: Provisions related to subsidised expenditure in the existing SME scheme will be removed. This allows companies with subsidised or grant-funded R&D projects to be eligible for relief under the new rules.

  • Enhanced support for R&D-intensive SMEs: The SME tax credit rate will be set at 14.5% and the R&D intensity threshold will be reduced from 40% to 30% for accounting periods beginning on or after April 1, 2024. This change aims to support SMEs heavily invested in R&D.

  • Fraud prevention: HMRC is taking steps to prevent R&D tax relief fraud, which has reportedly cost £1.13 billion. Changes include restricting tax refunds and R&D tax credits to claimant companies only and eliminating the option for third-party nominations.

Applying for R&D tax relief 

On a top level, the process of claiming R&D tax relief involves:

  • Identifying qualifying R&D projects and expenditures

  • Ensuring proper documentation of R&D activities and expenditures

  • Completing the R&D section in your Corporation Tax Return

The introduction of the changes brought about in the Autumn Statement 2023 has raised concerns about increased complexity and uncertainty for businesses. The differing tax and credit rates for profit and loss-making companies, the inclusion and exclusion of certain cost categories and the continued relevance of the SME definition amidst the new R&D-intensive company rules add layers of complexity.

Businesses should seek guidance from tax professionals or consultancies who specialise in R&D tax to navigate the process effectively. After all, preparing complaint R&D tax relief claims is crucial. With new R&D tax relief rules in place, HMRC is cracking down on challenging claims of all sizes.

That's why we partner with Novus Capital, an R&D tax, grants and fundraising specialist. Managing Director of Novus Capital, Jenson Brook, shares his thoughts on the changes HMRC have made to the R&D tax scheme in recent years:

"HMRC has made changes to the R&D tax scheme three times over the past 24 months. As such, it's become more important than ever to make sure your R&D tax relief claims are compliant due to HMRC's behaviour with enquiries and subsequent penalties if claims have been prepared incorrectly. Today, HMRC expects claimant businesses to hold a good understanding of R&D tax so choosing an R&D tax advisor who can educate and guide your business is key if you plan to claim in the future."

If you're looking for further support and advice around this area, contact the Novus Capital team directly.

R&D tax relief represents a significant opportunity for UK start-ups and scale-ups to fuel innovation and growth. With recent updates causing upcoming changes to the landscape, businesses need to stay informed and compliant to maximise their benefits. By understanding and leveraging R&D tax, innovative businesses can offset their costs to foster a more robust and dynamic UK economy.

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