R&D tax relief: Are you maximising the opportunity?
Many small or medium enterprises (SMEs) still don’t realise that they qualify for research and development (R&D) tax incentives. As businesses contend with the economic challenges and the continuing threat of recession, this relief could provide a valuable cash injection.
Significant changes are being made to the R&D tax credit schemes, some of which come into force from 1 April 2023. The enhancement rate for SMEs is being reduced to 86 % (from 130 %) and the rate at which companies can surrender losses is being reduced to 10 % (from 14.5 %); these changes can result in a reduction of more than 30% in the tax benefit.
On the flipside a ’rebalancing’ of the two R&D relief schemes means larger companies or those making a claim under the R&D expenditure credit (RDEC) regime will see an increase from 13% to 20% (gross benefit).
Further, in the most recent budget announcement, a new ‘R&D intensive’ rate is being introduced for loss-making SMEs where their R&D qualifying expenditure is at least 40 % of total expenditure.
With this in mind, planning around R&D tax is crucial to achieve the best outcome for an organisation.
To help businesses understand the scheme and the possible opportunity, R&D expert at Azets, Gemma Monaghan, explores the key details below.
What is R&D tax relief?
The R&D tax relief scheme is designed to incentivise innovation within the UK and reward companies conducting research and development The benefit is only available to limited companies.
The qualifying criteria for the SME scheme are:
- an organisation with fewer than 500 Full-Time Employees ; and
- an annual turnover not exceeding €100m or balance sheet assets (gross) not exceeding €86m.
Why is it so important to get it right?
HMRC is scrutinising claim submissions due to fraudulent activity and a year on year increase in submissions. It’s therefore critical to partner with a trusted advisor and ensure a claim is robust and compliant, both from a technical and financial perspective.
For companies undertaking R&D projects and subsequently incurring R&D expenditure, there could be significant tax savings or cash repayments available. Given the complexities with the current schemes and the different benefit options for a company, careful planning is paramount to ensure the R&D benefit is utilised in the most effective manner.
Some of these complexities affecting a claim include:
- group structure and associated enterprises.
- grant income.
- contractual relationships between companies.
Each need to be reviewed, considered and applied correctly.
What costs can be claimed?
Broadly, to qualify for an R&D tax relief claim, a company’s project must seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainties. This R&D definition can lead many to believe that the activities they undertake and expenditure they incur are not qualifying.
How to identify an R&D opportunity
Some high-level questions to help identify R&D claims opportunities are:
- Are you developing new or improving existing products or processes above what is available in the market?
- Have you encountered failures within a project where the solution wasn’t readily achieved by your workforce?
- Have you had a project fail due to technical reasons?
- Have you combined different technologies that haven’t been achieved to date, with no guarantee of success?
- Have you contracted any specialist design functions to support a project?
If you have any questions on R&D tax relief, contact Gemma Monaghan, R&D Tax Director, on 0141 886 6644 or email [email protected].