Originally introduced in 2000 for SMEs and 2002 for large companies, Research and Development (“R&D”) credits have been around for over 20 years. Over the years, the scheme has changed many times, including changes to eligibility criteria, rates and overhauls of the claiming process.

This blog will focus on outlining what the current scheme is as of March 2024; it should be noted that the government has announced a new merged scheme with the intention of creating a unified application process for both SMEs and large companies and will effect companies claiming where their accounting period started on or after the 1st April 2024. Once more details have been published by HMRC a future blog post will be published.

High level eligibility

The following items provide the eligibility criteria that must be met to make a successful claim:

• The company subject to Corporation Tax.
• The company must be undertaking R&D that is relevant to the company.
• Expenditure for which it wants to claim must be:
  • Qualifying expenditure and
  • Allowable as a revenue deduction for CT
• If a project fails it’s OK, eligibility is determined by whether the work aimed at achieving the advance.
• An advance must be a step forward for the entire field of tech and not just the state of knowledge or capability of the company. The overall knowledge and capability of a field is determined by what is publicly available or deductible from public domain knowledge. It can still be an advance if another company has done it but the information on how they achieved it is not public.

It should be noted that there are 2 further questions which need to be answered before making a claim:

• Could the activities be treated as R&D under Generally Accepted Accounting Practice (GAAP) – accounts definition?
• Do the activities meet the definition of R&D for tax purposes?

Accounts definition of R&D

From an accounts perspective “Research” and “Development” are defined in the glossary of FRS102. Below is a summary of such definitions

Research

Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding

Development

Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use

Examples of research

*Activities aimed at obtaining new knowledge *The search for, evaluation and final selection of, applications of research findings and other knowledge *The search for alternatives for materials, devices, products, processes, systems or services *Formulation, design, evaluation and final selection of possible alternatives for new or improved material, devices, projects, processes, systems or services

Examples of development

• The design, construction and testing of pre-production or pre-use prototypes and models
• The design of tools, jigs, moulds and dies involving new technology
• The design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production
• The design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services

Definition of R&D for tax purposes

The SIT guidelines define Scientific or Technological Advance (“STA”) and Scientific or Technological Uncertainty (“STU”) in the following ways

Scientific or Technological Advance (STA)

“An advance in overall knowledge or capability in a field of science or technology”

The advance can be tangible or physical improvements but also intangible, e.g. developing new knowledge leading to process improvements that create cost savings

An advance is to:

• Extend overall knowledge or capability in a field of science or technology, or
• Create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology, or
• Make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes, or
• Use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way”

Scientific or Technological Uncertainty (STU)

“Knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deductible by a competent professional working in a field”

What are the schemes for 2023/2024?

There are in fact 3 schemes which cover the 2023/2024 tax year. There is more detail but this blog keeps it a high level.

SME scheme

An SME is defined as a company with

• less than 500 staff
• a turnover of under 100 million euros or a balance sheet total under 86 million euros

For qualifying expenditure, SMEs can claim an enhancement rate of 86% (except for companies with profits below £250k but tax savings will be contingent on the rate of tax that they pay – either @ 19% or 25%)

The company will surrender the lower of

• Total enhanced R&D expenditure, or
• Unrelieved trading loss within the company

With that in mind, if the SME is loss making then 10% of enhanced qualifying expenditure or unrelieved trading loss can be claimed back as cash.

R&D Intensive

Loss-making SMEs whose R&D expenditure constitutes at least 40% (for expenditure incurred on or after 1 April 2023, which has now been updated to 30% for accounting periods beginning on or after 1 April 2024) of total expenditure, referred to as ‘R&D intensive SMEs’.

This scheme was Introduced in 2023 Spring budget whereby the expenditure claim still sits at 86% but the instead is eligible to claim 14.5% of the enhanced expenditure as cash.

RDEC

Rather than enhanced expenditure claims, the RDEC scheme works as a taxable credit based on the qualifying expenditure. Companies claim 20% of the qualifying expenditure and are then taxed on it as it is treated as income and included in profit before tax.

To qualify for the RDEC scheme the company must:

• Be large through the period;
• Carry on a trade;
• Have qualifying expenditure that is deductible against corporation tax of the company’s trade for the accounting period.

Examples of Research and Development

• Software development – Creation of a new or appreciably improved version of a software product.
• Pharma/life sciences – creation of a new drug substance and/or process to detect an illness earlier.
• Automotive – Development of a new vehicle, or individual component with lower CO2 emissions.
• Banking – Developing of an internal usage software system designed to manage client funds.
• Manufacturing – Improvement of a manufacturing process in terms of processing times, reducing wastage or integrating enhanced control/quality solutions with fewer lineside employees.
• Retail – development of a unique online shopping portal and/or bespoke product inventory system.
• Architecture – creation of appreciably improved designs (functional not aesthetic) for eco-homes.
• Construction – Development of new, improved or more sustainable construction materials or methods.
• Food manufacturing – Development of an appreciably improved system for adding water to meat products or reducing sugar content from products.
• Brewing/distilling – Improving a distilling or brewing process to enable an appreciably increased throughput but using less energy for the process.

Although on paper this may seem straight forward, it should also be considered there are many nuances to eligibility and making claims such as:

• If the company is a subsidiary.
• If another company holds voting rights within the company.
• If any indirect qualifying activities took place.
• If contractors/externally provided workers were involved in the project.
• If anyone was hired from abroad.

The world of R&D is a complex landscape, there are some straightforward claims, and others which require specialist intervention; however, we recommend to always consult with an R&D specialist to ensure your following legislation as things are changing all the time. Though the intricate landscape of R&D can be daunting, Tax Edge Advisory can guide you every step of the way with our extensive experience and expertise. Get in touch now!