You may recall that in November’s Autumn Statement, Jeremy Hunt promised to return with a more robust R&D tax credit scheme for smaller research-intensive companies. Well, in the Spring Budget earlier this month, updates to Research and Development (R&D) reliefs were announced. These updates to the Research and Development Expenditure Credit (RDEC) rate, meaning that the UK now has the joint highest uncapped headline rate tax relief in the G7 for large companies.
R&D reliefs support companies who focus on innovative scientific and technological projects, meaning that the government’s scheme influences the extent that the UK can be a driving force of advancement.
If you are claiming R&D relief, you must be able to explain how the project:
- looked for an advance in science and technology
- had to overcome uncertainty
- tried to overcome this uncertainty
- could not be worked out easily by a professional in the field.
What will be introduced?
For expenditure that is incurred on or after 1st April 2023, the RDEC will increase from 13% to 20%. This means that large companies and qualifying SMEs can claim a 20% cash credit back on qualifying R&D expenditure. Alongside this, however, the SME additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%. For loss-making R&D intensive SMEs, a higher payable credit rate of 14.5% will be available.
To qualify as R&D intensive, a business must spend 40% of their total expenditure on R&D. Here, total expenditure is calculated from the total expenses figure in the profit and loss (P&L) account, adjusted by adding any amount of expenditure used under s1308 Corporation Tax Act (CTA) 2009 and by subtracting any amount not deductible for Corporation Tax purposes. This ‘enhanced credit’ announced by Hunt will allow loss-making R&D intensive SMEs to claim a credit worth £27 for every £100 they spend.
Hunt gave the example that if an eligible cancer drug company spends £2 million on research and development, they will receive over £500,000 to help them develop breakthrough treatments.
| Pre-April 2023 | From April 2023 | ||
|
Loss-making SME
|
Enhanced deduction | 130% | 86% |
| R&D credit | 14.50% | 10% | |
| Benefit | 33.50% | 18.60% | |
|
Profit-making SME
|
Enhanced deduction | 130% | 86% |
| Corporation tax rate | 19% | 25% | |
| Benefit | (up to) 24.7% | (up to) 21.5% | |
|
RDEC company
|
RDEC credit rate | 13% | 20% |
| Corporation tax rate | 19% | 25% | |
| Benefit (after tax) | 10.53% | 15% |
There will also be changes to the process of claiming Research and Development relief…
For a company who is seeking to make an R&D claim for the first time, or has not made one for the previous three accounting periods, then there is a new online pre-notification requirement that it is subject to. This means that unless it has submitted the full claim within the six-month deadline, it must inform HMRC of its intention to make an R&D claim, and let them know who its R&D advisor will be, within the six months following the end of the relevant accounting period.
What Research and Development costs can be claimed?
From the start date of a project, there are certain costs that R&D can be claimed for throughout. These include…
Employee costs
This includes claiming for a proportion of salaries, wages, Class 1 National Insurance contributions, pension fund contributions. Similarly, you can claim for administrative or support staff who work to directly support a project. You cannot claim for clerical or maintenance work that would have been done anyway, like managing payroll. You can also claim 65% of the relevant payments made to an external agency if they provide staff for the project.
Subcontractor costs
You can claim 65% of the relevant costs of using a subtractor for your R&D activities.
Software
If you had to buy software licence fees, you can claim for these, as well as a reasonable share of the costs for the actual software used in your R&D activities.
Consumable items
You can claim for the relevant proportion of consumables such as materials and utilities used in the project.
Clinical trials volunteers
For pharmaceutical projects, claims can be made for the payments made to volunteers involved in clinical tests.
Costs that cannot be claimed:
- the production and distribution of goods and services
- capital expenditure
- the cost of land
- the cost of patents and trademarks
- rent or rates.
If you would like further advice about your R&D relief for your SME, please don’t hesitate to get in touch:
+44 (0) 1 942 816 512
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