Many companies carry out Research & Development (R&D) without realising that their activity could bring them within scope of R&D tax. It matters because R&D tax relief is particularly generous.
What relief is available?
There are two main R&D tax reliefs: Small and Medium-sized Enterprise (SME) R&D relief, and Research and Development Expenditure Credit. The first can provide an enhanced 130% deduction against taxable profits for qualifying R&D expenditure, in addition to the expenditure involved, making a total deduction of 230%. The second is potentially available to larger companies, and SMEs in particular circumstances. It allows a company to claim a credit calculated at 13% of qualifying R&D spend.
Have there been any recent changes?
The latest changes to qualifying R&D expenditure now allow relief for specific data and cloud costs from April 2023: licence payments for datasets, and cloud computing costs attributable to computation, data processing and software. There are also measures ‘refocusing’ the reliefs on innovation in the UK, and thus restricting some costs for R&D activity carried out overseas.
Does all R&D activity qualify for relief?
No, not all activity described as R&D in commercial parlance counts as R&D for tax relief purposes. For tax relief, the activity must fall to be accounted for as R&D under generally accepted accounting practice and must also conform to definitions set out in BEIS Guidelines. Qualifying projects are those aiming to make an ‘advance in science or technology’ through the ‘resolution of scientific or technological uncertainty’.
It goes without saying that subtle technical distinctions apply. An uncertainty that could be readily resolved by a competent professional in that field, for example, does not count. And an advance in science or technology must be one that has a bearing on the overall capability in a particular field, not one that relates solely to the individual company’s own knowledge or capability.
Is there anything else I should be aware of?
Having a clear idea of where your company sits with regard to R&D activity also matters for another reason. There is increasing government concern about error and fraud in R&D claims. One way such error can arise, for example, is through the use of unregulated, so-called R&D ‘specialist’ firms. Many of these operate by obtaining tax refunds for R&D claims that turn out not to be robust enough to withstand subsequent HMRC checks.
How are R&D claims made?
Legislation is being laid to improve R&D compliance, with various changes to the claims process anticipated. From April 2023, claims will be made digitally in most cases, with additional detail given. A named senior officer of the company will have to endorse claims, and where an agent has advised on the claim, their details will also be needed. With increased HMRC compliance activity on the horizon, it is more important than ever that claims are watertight.
If, perhaps, you have not previously considered whether your company is involved in qualifying R&D, we should be pleased to explore the issue with you. Please do contact us for more information on this, or any other area relating to R&D.
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