Over the past few years, HMRC has tightened the rules around R&D tax relief. With growing concern that too many claims are invalid, they’ve not only revised the reliefs available but also ramped up compliance checks.
In this article, we take a closer look at what qualifies as R&D and the key changes you need to know about.
What exactly is Research and Development?
This is often the trickiest part for businesses to get right. For your project to qualify, it needs to count as R&D from an accounting point of view and meet the specific criteria set out in tax legislation.
At its core, the project must aim to advance science or technology. That means pushing knowledge or capability forward and tackling something that isn’t already solved or widely known. It’s not about things like marketing or routine production – it’s about solving a real technical challenge.
Think of it as problem-solving through innovation. Maybe your company is trying to develop a faster, cheaper, or more efficient product or process – and it takes some trial and error to get there. If the solution isn’t obvious, and you’re genuinely breaking new ground, there’s a good chance it might qualify.
What has changed?
Prior to April 2024 two schemes were in operation, the SME scheme and the RDEC scheme for those not qualifying for the SME scheme, with the SME scheme historically being more generous.
Since April 2024 the schemes have been merged into one scheme, based on the RDEC scheme.
Most Companies will now get a taxable credit of 20% of qualifying R&D expenditure. The tax credit is added to taxable profits on the tax return, but it can then be used to settle tax liabilities, surrendered to other group companies or repaid if the company is a going concern.
Let’s look at an example for a profit-making company
Note: This example assumes a 25% Corporation Tax rate. In practice, some companies may be subject to marginal or hybrid rates depending on their profit levels. We have used 25% here for simplicity.
And how this works for a loss-making company:
* Note: The £135,000 figure used here is purely for illustrative purposes. The actual cap is calculated as £20,000 plus three times the company’s total PAYE and NIC liabilities — it is not a standard amount.
Quarterly corporation tax instalments
If your company is paying quarterly instalment payments, your tax estimate should be before any RDEC adjustment, so typically will be overpaid throughout the year and then a repayment made once the claim is put in.
Claim notifications
In order to avoid retrospective claims, since April 2023 companies which have not claimed R&D within the past three years must notify HMRC within 6 months of the accounting period end, in order to be able to claim relief. Advice here is to check these dates carefully if you have not recently claimed.
Additional information
As well as the previous details, the new requirements are that claims must include:
- Someone within the company must be nominated as a senior R&D contact.
- Details are required for all, or a sample of projects.
R&D intensive companies
R&D intensive companies can continue to claim under the previous SME regime. An R&D intensive company is one where 30% of total relevant expenditure (that which is brought into account in calculating profits for CT purposes) is relevant R&D expenditure (that which qualifies for R&D relief).
Note: For accounting periods beginning on or after 1 April 2024, the threshold to qualify as R&D intensive dropped from 40% to 30%, meaning more companies may now meet this definition.
When looking at the test, all associated companies are included.
If qualifying, the company can deduct an additional 86% of qualifying R&D costs from taxable profits. If this generates a loss, subject to certain conditions, it can be surrendered for a 14.5% repayable tax credit of the loss surrendered.
If your company does not meet the intensity condition in one year but met it the year before it can be treated as an R&D tax company.
What can be claimed for?
- Staff costs – those undertaking R&D including salary, R&D related expenses, NIC and pensions, but excluding benefits.
- Software and consumables – R&D related software including data costs, cloud computing and pure maths, and consumable materials including water, fuel and power.
- Externally provided workers – Agency payments but not payments for the self-employed.
- Clinical trials – Payments made to participants but not general costs.
Other changes from 1 April 2024
There was also a change relating to subcontractors. The claim is now made by the decision maker, and in most cases this will be the customer, although it can be the supplier in some cases. If the supplier wants to claim, the onus is now on them to prove the customer is indifferent to claiming.
Only UK and qualifying overseas expenses are allowed. Subcontract work must be done in the UK, and externally provided workers must be paid via a UK payroll and perform their work in the UK.
Qualifying overseas costs would be when geographical, environmental or social conditions, or legal or regulatory requirements dictate it. Lack of UK expertise or cost considerations are not acceptable reasons for overseas costs.
Common problems
- Misunderstanding or “stretching the truth” on R&D activities in accordance with the guidelines.
- Misidentification of eligible expenditure
- Poor supporting documentation
- Incorrect calculation of the claim
What makes for a good claim or agent?
A good claim will have sufficient financial and project information to ensure the claim requirements are met, and it’s advisable to use a specialist in this area. Unfortunately, recent years have seen a plethora of “specialist R&D advisors” so how do you know if your advisor is a good one? Some tips are:
- Be wary of over-ambitious claims such as “100% of claims agreed” or “HMRC approved”
- Are they accredited with any accounting body?
- Are they asking sufficiently detailed questions in preparing the report?
- Is dealing with any HMRC enquiries included within the service?
The good news is that for many years we have partnered with a trusted specialist advisor in Markel Tax. Contact us for a conversation about how your company could be eligible for this relief.