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R&D tax relief

R&D tax reliefs – known to many as very generous tax breaks given to companies that undertake qualifying research and development activities. For businesses, it’s a welcome benefit for undertaking the complex (and often costly) R&D work. Now, HMRC has announced a significant change in how these reliefs work, namely that the two existing reliefs, R&D Expenditure Credit (RDEC) and R&D SME are to be merged. Here is a summary of what you need to know about R&D tax relief changes and how they will affect you. 

The background 

With sizeable sums of money to be saved through the old R&D schemes, in the last few years many ‘advisors’ who specialise in this field have pushed the envelope when it comes to R&D activities and supported claims which fail to meet the qualifying criteria. As a result, HMRC are now investigating a high percentage of these historic claims and taking action to recover any tax claimed incorrectly. In many cases, this results in cashflow issues and potential penalties imposed on claimants. 

Why does this matter? This has (in part) triggered more scrutiny of R&D relief claims and notification procedures. Although, the main objective behind these changes is to continue to support innovation and the advancement of new technologies, in a fairer and more transparent manner. The new system is undoubtedly one that won’t be so easily manipulated. But heed it as a warning. This is already a specialist area of tax and one that’s about to become more involved. If you have made or are going to make an R&D Tax Relief claim, we would advise using Foxley Kingham partners, Markel Tax. They are very experienced in this field and have the specialist knowledge, resources, and experience to defend a claim at no cost to you. 

R&D tax relief changes – the new system 

Up until recently, there were two schemes available – one for large and one for small businesses. Applicable from 1 April 2024, the two existing schemes will now be merged into one scheme, called Research and Development Expenditure Credit (RDEC). 

So, how does it work? 

If you have qualifying R&D expenditure (in other words, you’re seeking to advance a new idea in science or technology) then the normal tax relief under RDEC will be a tax uplift of 20%. That means if you spend £100,000 of qualifying expenditure you can claim a further deduction against profits of £20,000.

However, if you are both a loss-making company and more than 30% of your expenditure is qualifying R&D then you will be able to claim the enhanced ERIS (Enhanced R&D Intensive Support) relief.  This provides more government support giving you an uplift on qualifying expenditure of 86% and an option to claim the total back in cash at a rate of 14.5%.  

An example

Your company made a loss of £100,000 and undertakes qualifying R&D activities. The qualifying expenditure equates to £75,000 out of £200,000 total expenditure, so this qualifies for ERIS.  The £75,000 is uplifted by 86% – £64,500 to £139,500.  So, the tax loss is uplifted by £64,500 to £164,500.  This loss can be retained and carried forward against profits or claimed as a cash repayment at 14.5%, in this case, equating to £23,852.

Top tips for claimants

  • Use the UK Government’s own guidelines to help you identify what qualifies as appropriate R&D activity. You can find these here. Once you’ve identified appropriate R&D activity, be sure to run these by an experienced professional, who will give you confirmation of whether it qualifies. 
  • With every claim submitted, you should clearly define your case and give detail that explains how you arrived at that decision. 
  • The structure of your submission is important, as is a well-constructed technical report complete with supporting evidence. 
  • HMRC acknowledges that claims are more likely to be successful if appropriate records are kept, in line with any qualifying activities. If you’re unsure of what sort of records you should be keeping, read HMRC’s useful guidance here or speak to an appropriate professional. 

For all of the reasons listed above, you should be sure to work with a reputable and experienced partner for any RDEC submissions – especially now that the R&D tax relief changes have been implemented. This will ensure your claims are submitted for qualifying activities, minimising the chance of your claim being investigated. Markel Tax is Foxley Kingham’s official partner for R&D claims. If you wish to have a free, no-commitment, confidential conversation about your business and potential R&D claims, get in touch with Steve Sansom