Many SMEs still don't realise that they qualify for research and development (R&D) tax incentives. As businesses contend with the economic challenges and the continuing threat of recession, this relief could provide a valuable cash injection.
However, significant changes are to come into force from April 2023. These changes represent a reduction of more than 30% in the tax benefit to most SMEs undertaking R&D activity.
On the flipside, in what was regarded as a ‘rebalancing’ of the two R&D relief brackets, larger companies or those making a claim under the R&D expenditure credit (RDEC) scheme will see an increase from 13% to 20%.
With this in mind, planning around R&D tax is crucial to achieve the best outcome, especially if the goal is to reduce tax liability.
To help businesses understand the scheme and the possible opportunity, we explore the key details below.
What is R&D tax relief?
The R&D tax relief scheme is designed to incentivise innovation within the UK and reward companies conducting research and development. It’s important to highlight that the benefit is only available to limited companies.
The scheme falls into two brackets:
The Small Medium Enterprise (SME) scheme.
One for large companies, the Research and Development Expenditure Credit (RDEC) scheme.
The qualifying criteria for the SME scheme is as follows:
An organisation with fewer than 500 Full-Time Employees (FTEs).
Annual turnover not exceeding 100m or balance sheet not exceeding 86m.
Other factors that can impact SME status include:
Group structure and associated enterprises.
Grant income.
Contractual relationships.
Why is it so important to get it right?
The Revenue are closely monitoring claim submissions due to fraudulent activity and a year on year increase in filings. It is therefore critical to partner with a trusted advisor and ensure the claim is robust and compliant.
For companies undertaking R&D projects and subsequently incurring R&D expenditure, there could be significant tax savings or cash repayments available. The benefit of R&D tax credits can vary considerably depending on how the relief is applied. This is why careful planning is paramount to ensure that this R&D benefit is utilised in the most efficient manner.
What costs can be claimed?
Broadly, to qualify for an R&D tax credits claim, a company’s project must seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainties. This R&D definition can lead many to believe that the activities they undertake and expenditure they incur are not qualifying.
However, in our experience, clients often do not realise the potential for R&D in their work. Business owners and senior stakeholders are therefore, in some situations, not making the most of R&D incentives and the tax savings the scheme offers.
How to identify an R&D opportunity
Some high-level questions to ask to help identify R&D claims opportunities are:
Are you developing new or improving existing products or processes above what is available in the market?
Have you encountered a number of failures within a project where the solution wasn’t readily achieved by your experienced workforce?
Have you had a project fail due to technical reasons?
Have you combined different technologies in a way that hasn’t been achieved to date, with no guarantee of success?
Have you had to contract any specialist design functions to support a project?
We are here to help
We will assist our clients in preparing a technical and financial analysis of their claim, in accordance with HMRC’s new disclosure requirements. We always undertake a best advice tax planning exercise on the impact of your claim.
Once filed, we will see the claim through to its HMRC processing. Unlike most others in the R&D tax consultants world, we ensure your refund is sent directly to you by HMRC. In the event that HMRC want to review the claim, we can handle the full enquiry process on your behalf.
If you have any questions on the scheme and the process for claiming R&D tax relief, please get in touch with a member of our specialist R&D team.
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