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R&D tax relief: what you need to know

Author: ICAEW

Published: 27 Mar 2024

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Research and development tax relief is a key government incentive encouraging much-needed investment. Making a claim requires thought and planning, an understanding of the common pitfalls and possibly external support, too.

If a company is subject to UK corporation tax and is undertaking research and development (R&D), it can potentially claim R&D tax relief. The R&D activities must be capable of being accounted for as such under generally accepted accounting practice. In addition, a claim must show that a project seeks to resolve specific uncertainties to achieve an overall advance in a qualifying field of science or technology. 

Crucially, the innovation does not have to be successful to claim R&D tax relief; it is the process and efforts to push boundaries and advance knowledge that are critical components of any submission. “R&D tax credits are about helping companies make scientific or technological breakthroughs,” explains Richard Jones, Senior Technical Manager, Tax Policy at ICAEW. “Effectively, they are an investment by the government in future growth because those breakthroughs help to create economic activity, which in turn generates profits and ultimately tax income.”

Businesses also find them incredibly useful. “While grants and other funding have been the primary drivers in getting our research off the ground, the R&D tax helps to de-risk the process. It effectively gives us cash flow back in the future, which allows us to do a lot more and makes our investors’ money work harder,” says Tanuvi Ethunandan, CEO and co-founder of tech start-up Data Duopoly. 

How to compile a strong claim

When making a claim for R&D tax relief, start by identifying the right work. “Sit down with the relevant technical team and talk through that year’s projects to identify those that were technically challenging,” outlines Carrie Rutland, Partner, Innovation Incentives at BDO. “Pinpoint those technical challenges and how long it took to solve them. The starting point is when R&D work begins to overcome an identified challenge and the endpoint is when a working solution is found or the process is aborted. Once you have the defined time period, think about the associated costs. Who was working on the project during that timeframe? What other costs were involved?”

Not all costs will qualify for claims, and there have been several recent changes. For instance, for accounting periods beginning on or after 1 April 2023, cloud computing costs can be included, while for accounting periods beginning on or after 1 April 2024, overseas costs will cease to apply. Once the costs are identified, the claim is compiled and submitted as part of the company’s tax computation. As of August 2023, companies must also submit an additional information form that, among other things, requires a technical description of the majority of the qualifying projects included in the R&D claim. This must be submitted before the corporation tax return using an online portal.

“Getting the technical story straight is essential,” notes Ethunandan. “We did a lot of work with our developers, where they explained the innovation and the approach taken. This helped us demonstrate the boundaries between existing technology and the innovation part.”

Similarly, avoid claiming that 100% of projects are technically challenging. “HMRC will take the view that your company has some skill in its given areas and will not believe that everything is a new challenge,” says Rutland. “So demonstrating those boundaries between the bits the company does know how to do and those that are new will help provide a clearer articulation of the innovation to HMRC.”

Preparing for increased scrutiny

Getting the technical description right has become even more important this year, as HMRC has stepped-up its scrutiny. A National Audit Office report in January 2024 highlighted estimates of £1.04bn of fraud and error in R&D SME relief in 2020-21, and HMRC has now opened a dedicated R&D anti-abuse unit – recruiting hundreds more R&D compliance inspectors to conduct checks. 

A recent Public Accounts Committee Report shows checks are now conducted on 20% of claims, compared with 1% previously. This can extend timeframes way beyond HMRC’s stated target of paying 85% of payable claims within 40 days. Jones says that “the tendency at the moment is to throw the kitchen sink at any submissions that fall short and ask a lot of questions. It can take a long time to respond to these and resolve the queries; in some cases, years.”

Getting ready for new changes

Further changes will also be introduced for claims made for accounting periods beginning on or after 1 April 2024. In the 2023 Autumn Statement, the government announced several amendments to R&D tax relief, most notably the merger of the SME relief scheme and the R&D expenditure credits (RDEC) for large businesses. Rutland explains: “Theoretically, it should be simpler because there is one set of rules that is applicable for most companies (other than loss-making R&D-intensive SMEs). Unfortunately, the additional complexity introduced by the new contracted-out R&D is likely to far outweigh any simplification achieved by the new regime. Indeed, this may mean the level of error in R&D claims continues for a while, until companies are familiar with the new requirements.”

Changes to overseas costs are also set to be introduced. For instance, it did not matter previously if R&D work did not take place on UK soil, but in a bid to encourage domestic job creation and innovation, this has now changed. “This brings the UK in line with most other R&D regimes around the world,” says Rutland.

Accessing advice and support

Companies looking for additional information on R&D tax claims may often refer to information on the internet. “However, the information is not always sufficiently detailed or as up-to-date as might be required when compiling a submission,” says Rutland.

Except for large companies, which are more likely to have in-house expertise, most businesses opt to submit claims through an external adviser. However, companies should be cautious when choosing their partner, as ‘cowboy’ operators are certainly active in the market and have made a large contribution to the high levels of fraud identified by the HMRC. “First of all, I would make sure that the firm used is a member of a professional body, such as ICAEW or the Chartered Institute of Taxation,” Jones advises. “ Second, watch out for red flags. Often, these rogue agents will put claims in their advertising, which are plainly wrong, such as they have a 100% success rate or that their claims are pre-approved by HMRC.”

Recommendations and word of mouth are also useful guides for providers. “In the start-up community, there are several founder WhatsApp groups, where you can ask for recommendations and find out about the percentages charged,” Ethunandan says. “This is particularly helpful when so many R&D specialists are targeting the space.”

What you need to know

R&D tax relief brings many benefits to companies undertaking scientific and technical work, helping them maximise their investment and improve future cash flow. However, the scheme is subject to regular change and there are numerous points at which submissions can fall short. This is a particular concern given HMRC’s increased scrutiny of claims. 

If you are one of the many companies that could qualify:

•  understand what kind of work will qualify for the relief;
•  detail what those projects were, what work was involved, over what time period it occurred and what the cost was;
•  make sure you supply the right information at the right time to HMRC; and
•  develop in-house expertise or work with an experienced tax professional to navigate the complexities of the R&D tax regime.

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