Introduction to R&D Tax Credit Scheme
The UK Government places significant emphasis on business as the primary driver of economic growth and innovation. Thus, the UK's research and development (R&D) tax credit schemes are pivotal in supporting innovative activity among UK-based companies. These Research and development tax credit schemes are an essential factor for businesses when assessing the competitiveness of the UK's corporate tax system.
By incentivising businesses to invest in R&D, the UK Government aims to foster innovation, enhance productivity, and bolster the country's economic growth. The Research & Development tax credit schemes have proven effective, encouraging companies to engage in R&D activities that might otherwise be deemed too risky or costly.
The Evolution of the R&D Tax Credit Scheme
The R&D tax credit scheme was introduced in 2000 for SMEs and was extended to large companies (LC) in 2002 with the LC scheme. The RDEC scheme (‘Above-the-Line’) was introduced in April 2013 for large companies. Companies could choose the RDEC scheme or the old LC scheme for expenditure incurred until the 31st of March 2016. Companies can make multiple claims in the same financial year if they have multiple accounting periods or qualify for multiple R&D schemes. For instance, SMEs may claim under the SME scheme and as a sub-contractor under the RDEC scheme.
As a result of this evolution, SMEs and the RDEC scheme became the main mechanisms for R&D tax credits and aligning with the government’s strategy to encourage research and development among businesses.
The Two Main R&D Tax Credit Schemes
(SMEs and the RDEC)
The Small and Medium-Sized Enterprise (SME) Tax Credit Scheme
The SME Scheme was introduced in 2000 to encourage innovation in small and medium-sized enterprises (SMEs) because smaller businesses were considered to be at a disadvantage compared to larger firms when it came to financing R&D programs and benefiting from potential spill-over effects. The scheme allows eligible R&D expenses to receive an increased tax deduction, enabling SMEs to claim up to 175% of their R&D spending as a deduction from their taxable profits. Even loss-making SMEs benefit from a payable tax credit, making it easier for startups and businesses in their early stages to access funding and support. This feature is particularly beneficial for small businesses, as it helps to reduce their tax liability.
Definition of SME: An SME is a company with:
- Less than 500 employees with either:
- an annual turnover under €100 million
- a balance sheet under €86 million
Declaration: Companies claiming under the SME Scheme need to declare linked, partnership or shareholding companies with a 25% share in the company and/or any company they hold a 25% share in.
Changes in the SME relief rates: The relief rates for the SME scheme have changed multiple times over the years. In April 2014, the payable credit rate increased from 11% to 14.5%, and in April 2015, the enhancement rate went up from 125% to 130%. In 2023, the SME enhanced rates were reduced from 130% to 86%, and the SME payable credit rate decreased from 14.5 to 10% for expenses incurred from the 1st of April 2023.
The SME Scheme and Advance Assurance
First launched in 2015, Advance Assurance is a voluntary scheme that provides SMEs claiming R&D tax relief assurance that their R&D claims will be processed without further enquiry from HMRC. HMRC guarantees that companies that obtain Advance Assurance claims will be accepted if they correspond with what was discussed and agreed upon in their application. HMRC’s advance assurance then applies to the company’s first three R&D tax relief claims.
Advance Assurance is not in itself a claim for R&D tax relief. Companies who have applied for advance assurance still have to claim relief via their Company Tax return (and additional information form if relevant).
The Research and Development Expenditure Credit (RDEC)
The RDEC Scheme was introduced in April 2013 to provide large companies with an ‘Above-the-Line’ credit option for claiming tax credits related to qualifying R&D expenditures. This was a flexible approach designed to replace the existing LC scheme and allowed companies to choose between the two schemes until March 2016, after which the LC scheme was discontinued. This was a significant development for companies involved in R&D.
The RDEC scheme is for large companies and SMEs that do not qualify for the SMEs Scheme or SMEs who have been subcontracted to do R&D work by a large company.
Definition of Large Company: a large company is a company with:
- More than 500 employees with either:
- an annual turnover in excess of €100 million
- a balance sheet of over €86 million
Changes in the RDEC Relief Rates: The RDEC rate has increased multiple times since the scheme’s introduction. It rose from 11% to 12% in January 2018 and then to 13% in April 2020. In 2023, the RDEC rate increased from 13% to 20% for R&D-related expenditures incurred from the 1st of April 2023.
Electronic submission and Additional Information Form (AIF) for all claims made on or after the 1st of August 2023
In 2023, new regulations were implemented to make the R&D tax regime more cautious about fraudulent and erroneous claims. The government requires companies to submit more detailed information, including digital amendments to Corporation Tax Returns for R&D claims. The government introduced prenotification rules and an “Additional Information form” (AIF) to ensure that the BIS guidelines are correctly applied to project activities. This measure came into effect on the 8th of August 2023, and any claims without an AIF are rejected.
Digital application for R&D Tax Relief: All claims to the R&D reliefs – either for a deduction or a tax credit are made digitally (except for those companies exempt from the requirement to deliver a Company Tax Return online) and are accompanied by a compulsory additional information form which breaks the costs down across qualifying categories and provides a description of the R&D.
R&D Claim Endorsement: Each claim must be endorsed by a named senior company officer.
Claim notification: Companies must inform HMRC in advance that they plan to make a claim. They will need to do this, using a digital service, within six months of the end of the period of account to which the claim relates. Claim notification will only be required when a claimant has not made an R&D claim for three years, ending with the day before the first day of the claim notification period.
The additional information and claim notification forms need to include details of any agent who advised the company on compiling the claim.
The Merged R&D Scheme (from the 1st of April 2024)
Threshold: The threshold to be considered R&D intensive will be reduced from 40% to 30% of total expenditure
Subsidised expenditures/grants: according to the policy paper, the rules relating to subsidised expenditure in the existing SME scheme will not be carried forward into the merged scheme. Thus, there will be no reduction in the amount of relief available to a company that receives a grant for part of the costs of their R&D (for example).
Rate of relief – SMEs would receive relief at the current RDEC rate of 20%. Meanwhile, the notional tax rate applied to loss-makers is the small profit rate of 19%, rather than the 25% main rate currently set in the RDEC.
Subcontractors – Where a company with a valid R&D project contracts a third party to undertake qualifying R&D activities, the company may claim the qualifying costs of that contract. The sub-contractor may not claim R&D relief. However, the sub-contractor may claim relief when it forms part of an R&D project for the contractor and not the customer. Similarly, as set out in the draft legislation in July 2023, R&D carried out by subcontractors working for non-UK taxpayers, such as overseas companies, will continue to qualify for relief.
Estimated Claim Figures for 2021 to 2022
According to the report published by GOV UK in September 2023, the estimated R&D tax relief support claims for the 2021 to 2022 tax year was 90,315, an increase of 5% from the previous year primarily due to a rise in claims across SMEs and RDEC schemes.
The estimated total amount of Research & Development tax relief support claimed for the 2021 to 2022 tax year was £7.6 billion, an increase of 11% from the previous year. This corresponds to £44.1 billion of R&D expenditure, 8% higher than the previous year.
If your company has spent money advancing science or technology and mitigating the technical uncertainties associated with developing new products, processes, or services or improving existing ones, you may be eligible for the research and development tax credit. The scheme enables companies that have spent money on research and development to claim cash back for the qualifying R&D activities or reduce their corporation tax bill.
Let Elevate R&D Solutions be your partner in accessing the funds you are eligible for. Get in touch with us today!
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