Innovation (Research & Development)
Innovation is important for companies if you are breaking new ground in your industry. If you are engaging in genuinely fresh technological or scientific advances, you will find R&D tax credits of great interest. These allow companies engaged in R&D to claim a reduction in corporation tax or, where the company has incurred losses, a repayable tax credit. Many businesses have used the credits to reduce their liabilities and significantly improve cash flow.
Eligibility
Companies working on project in any field of science or technology can qualify, provided the company is undertaking R&D activities that meet the following two criteria:
- The project must be seeking to achieve an advance in science or technology…
- … through the resolution of scientific or technological uncertainty.
- Salaries, employer’s NICs and pension contributions
- Subcontracted R&D (SME scheme only until 1 April 2024)
- Payments for external workers
- Software licences
- Materials and consumables including utilities
- From April 2023: data and cloud costs
Capital expenditure is not eligible, although separate R&D capital allowances may be available.
R&D Expenditure Credit
For accounting periods starting on or after 1 April 2024, there is now a single R&D tax incentives regime, merging the previous SME and large company R&D regimes. This new merged R&D tax incentive is the R&D Expenditure Credit (RDEC).
RDEC will provide companies with a credit to the P&L equal to 20% of the qualifying R&D expenditure identified. This provides a boost to the company’s reported profit before tax.
If the company has a corporation tax liability for the period, the RDEC is used by the company to reduce the corporation tax payable to HMRC. Because the RDEC is taxable, the net benefit to the company in corporation tax reduction will be equal to 15% of the qualifying R&D expenditure claimed.
Where the company doesn’t have a corporation tax liability it may be able to receive the credit as a cash payment from HMRC. The amount of cash credit that can be received (after tax) is 16.2% of the qualifying R&D expenditure claimed.
R&D intensive SME
While the main R&D incentives will now be the single RDEC scheme outlined above, there is also a more generous R&D tax incentive that can only be claimed by ‘R&D intensive SMEs’. These rules may apply where a company meets the criteria to qualify as an SME and spends over 30% of its total expenditure on qualifying R&D.
For loss making companies qualifying as R&D intensive SME’s the R&D tax credit receivable as cash from HMRC might be up to 27% of the qualifying R&D expenditure. The rules around falling within scope as an R&D intensive SME are complex so it is important to receive advice before claiming.
Larger companies, and smaller companies which cannot claim under the SME scheme because they do not meet certain criteria, may claim under the R&D expenditure credit (RDEC) scheme. This credit is calculated at 13% of the company’s qualifying R&D expenditure and is taxable as trading income.
Why trust Allegro on R&D?
R&D has recently become a thorny issue for many companies, as there are no barriers to entry in this area and lots of cowboy ‘tax advisers’ have appeared on the market.
When you work with Allegro Tax, you can rest assured that you have true professionals at your side, with the qualifications, experience and testimonials to prove that you are in the very safest of hands.
“It is great when working with tech startups as we do to have a tax expert like Sarah that they only need to pay for when they need it rather than having a tax partner as an overhead on our payroll. Augments our own specialist tax expertise so that we can give the same or better service as much larger firms.”
Stephen Gibbens. Accountech Solutions Limited
FAQs
R&D tax relief is a type of corporation tax relief for companies that are attempting to achieve an advance in science or technology by overcoming scientific or technological uncertainties. There are no specified sectors, meaning that companies in a wide range of sectors can claim the relief.
Under the SME scheme, a total 230% tax deduction is available for qualifying expenses.
Your company must be aiming to overcome scientific or technological uncertainties. However, the project does not have to be successful, and aborted or ongoing projects may still qualify.
Once the R&D finishes, the remainder of the project will no longer qualify.
Yes, the SME scheme is classed as government aid. This means that if another form of aid is received in relation to the project, the amount of R&D relief available may be restricted.
If the other aid received is notified state aid, then no expenditure on the project will qualify for R&D tax relief under the SME scheme.
If the other aid received is not notified state aid, the amount funded by the grant will not be eligible for R&D tax relief under the SME scheme, but other project expenditure may still qualify.
In both cases, expenditure which does not qualify for the SME scheme may qualify under the Research and Development Expenditure Credit (RDEC) scheme for larger companies.
A company cannot claim R&D tax credits on more than €7.5m of any one project.
RDEC is a credit incentive offered by the government to promote innovation. It is given as a taxable credit on the amount of qualifying R&D expenditure payable as cash, or as an offset against the company’s corporation tax liabilities. Whilst it is a credit incentive, it is not considered as state aid.
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