Companies that undertake research and development (R&D) may be able to benefit from targeted tax reliefs. There are two schemes – the SME R&D tax credits scheme and, for larger companies, the Research and Development Expenditure Credit (RDEC). The rate of relief changed from 1 April 2023.
Key dates
From 1 April 2023, the additional deduction that SME’s are able to claim in respect of qualifying R&D expenditure fell from 130% to 86%, reducing the total deduction from 230% of the qualifying expenditure to 186%. From the same date, the repayable credit available to loss-making companies fell from 14.5% to 10%.
For larger companies, the RDEC payable credit is increased from 13% to 20% from the same date.
This note explains when R&D tax reliefs may be available.
SME Scheme
The SME R&D scheme applies to companies that have:
- less than 500 staff; and
- turnover of less than 100 million euros and a balance sheet total is less than 86 million euros.
The scheme provides an enhanced deduction for qualifying R&D expenditure in computing the company’s taxable profits.
From 1 April 2023, the enhanced deduction is 86% of the qualifying expenditure, giving a total deduction of 186% of the expenditure. The effective rate of relief depends on the rate at which the company pays corporation; for a company paying corporation tax at the small profits rate of 19%, the effective rate of relief is 35.24%, whereas for a company paying corporation tax at the main rate of 25%, the effective rate of relief is 46.5%.
Prior to 1 April 2023, the enhancement was 130% — a total deduction of 230% of the qualifying expenditure. This provided an effective rate of relief of 43.7% (19% of 230%).
If your company is loss-making, you can claim a repayable tax credit. From 1 April 2023, this is given at the rate of 10% of the surrendable loss; prior to 1 April 2023, the figure was 14.5%. Legislation is to be introduced in a future Finance Bill to increase the rate to 14.5% for R&D-intensive companies whose R&D expenditure is at least 40% of their total expenditure. This will apply retrospectively from 1 April 2023.
The repayable tax credit is capped at 20% plus 300% of the company’s relevant expenditure on workers (broadly, the associated PAYE and National Insurance costs).
R&D expenditure
Expenditure is only eligible for relief if it is incurred on projects that fall within the definition of ‘R&D’.
To qualify, the work must be part of a specific project to make an advance in science or technology. Work towards advances in social science, such as economics, or a theoretical field, such as pure maths, does not count.
The project must relate either to your company’s existing trade, or to one that you intend to start up based on the results of the R & D.
When making a claim, you will need to be able to demonstrate how your project:
- looked for an advance in science and technology;
- had to overcome uncertainty.
- tried to overcome uncertainty; and
- could not easily be worked out by a professional in the field.
Your project must aim to create an advance in the overall field to qualify, not just an advance for your own business. It may research or develop a new process, product, or service, or it may improve an existing one.
The relief must be claimed in the company’s corporation tax return no later than two years from the end of the accounting period to which it relates. A digital ‘additional information’ form is being introduced from 1 August 2023.
RDEC
Larger companies that do not qualify for relief under the SME scheme may be able to benefit from the R & D Expenditure Credit. Under the RDEC scheme, relief for qualifying expenditure on R&D is given as a taxable payable tax credit rather than as an enhanced deduction, it is calculated as a percentage of the qualifying expenditure incurred in the relevant accounting period. For expenditures incurred on or after 1 April 2023, the percentage is 20%. For expenditures incurred prior to that date, the percentage is 13%.
It must be claimed in the company tax return no later than two years from the end of the accounting period to which the claim relates. Claimants must also complete CT600L when making their claim.
A SME may be able to claim the RDEC if they are unable to claim relief under the SME scheme.
Please see this HMRC link: https://www.gov.uk/guidance/corporation-tax-research-and-development-rd-relief
If you need more information regarding any of the topics covered in this update or indeed any other accounting issues, please call An Accounting Gem The Tax specialist in Ipswich, Suffolk on 744700.
To see another An Accounting Gem blog check out this link: https://www.aag-accountants.co.uk/what-is-an-associated-company/
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