25/03/24

Research and Development (R&D) Tax Reliefs

Research and Development (R&D) Tax Reliefs
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In 2000, the Government introduced Research and Development (R&D) Tax Credits, with the aim of incentivising both small and large companies to work on innovative projects in science and technology.

Around 90,000 companies claimed back £6.6bn in tax relief in 2021.

Tim Thompson and Naz Maqsoom provide a general outline of the nature of this incentive and explain how KANGS can assist in any HMRC investigation arising from the use of such tax incentives.

What Constitutes Research and Development?

R&D tax credit relief is accessible to those involved in research and development seeking to tackle technological challenges, such as re-designing existing machinery and developing new innovative products. The project being undertaken should also aim to provide potential advantages to the broader community.

The work must encompass the presence of scientific or technological uncertainty, which arises when it cannot definitively be determined, based on all available evidence, whether a process is scientifically or technologically possible. Further exploration is required, potentially including, but not limited to:

  • creating prototypes,
  • addressing specific procedural challenges,
  • developing new software,
  • repeated testing and altering of machinery, by way of trial and error.

The endeavours of those conducting such research and development do not have to be successful in order to qualify for the tax credits relief.

What R&D Schemes are available?

Small and medium-sized businesses (SMEs) claim through the R&D tax credits scheme. SMEs are ‘start-up’ businesses and businesses with fewer than five hundred staff and a turnover of under £100million.

Large companies, those having more than five hundred staff with a turnover in excess of £100 million claim through the Research and Development Expenditure Credit Scheme (RDEC).

SMEs

If an SME can achieve a profit as a result of its research and development projects, R & D tax relief materialises as a deduction of 186% of company expenditure in respect of qualifying research and development project profits that would otherwise be subject to tax.

In simple terms, 100% tax relief occurs on expenditure completed during the project plus another 86% of that expenditure in tax relief.
The figures below show the enhanced R & D tax relief figures and how they have changed since 2000: 1 April 2023 onwards: 186%

  • 1 April 2015 to 31 March 2023: 230%
  • 1 April 2012 to 31 March 2015: 225%
  • 1 April 2011 to 31 March 2012: 200%
  • 1 August 2008 to 31 March 2011: 175%
  • 1 April 2000 to 1 August 2008: 150%

Whilst the above relates to tax relief in respect of profits, tax relief is also provided within the scheme for SMEs trading at an overall loss.

If the SME project resulted in a loss, the R&D tax relief scheme, considering the trading loss that has been incurred and the qualifying R&D expenditure, allows the SME to surrender all or part of the loss for a payable R&D tax credit.

Large Companies

Before 31st March 2016, large companies’ tax relief was dictated via the Large Company Research and Development Relief. After that date, the R&D Expenditure Credit Scheme was established as a more generous package for large companies.

A large company is entitled to RDEC at the pre-tax rate of 20% for expenditure from 1 April 2023 of its qualifying R&D expenditure for an accounting period (an effective rate of 15% at UK main corporation tax rate of 25%, or 16.2% at the small profits rate of 19%) which is payable net of tax to loss-making companies.

Expenditure Qualifying For R&D Tax Credits

To qualify for R&D tax credits, expenditure must be revenue and not capital in nature and be attributable to relevant R&D undertaken by the company itself, on its behalf or in relation to it. Qualifying expenditure includes:

  • staffing costs,
  • externally provided workers,
  • software,
  • data licences,
  • cloud computing services,
  • relevant payments to the subjects of clinical trials,
  • consumable or transformable materials,
  • sub-contracted R&D, or
  • for large companies, contributions to independent R&D.

How Can We Assist?

The experts at KANGS are here to offer comprehensive guidance in relation to HMRC investigations arising from the R&D tax relief scheme. We are delighted to answer any questions you may have. If you ever find yourself under scrutiny by HMRC, it is crucial to seek immediate expert advice and support. Should you require our assistance, please contact using the details below.

Tel:        0333 370 4333

Email: info@kangssolicitors.co.uk

We provide an initial no obligation consultation from our offices in London, Birmingham, and Manchester. Alternatively, we provide initial consultations by telephone or video.

Hamraj Kang

Hamraj Kang
Senior Partner

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Tim Thompson

Tim Thompson
Partner

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Nazaqat Maqsoom

Naz Maqsoom
Associate

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