Does my company qualify for R&D tax credits?

Research and Development (R&D) tax credits were introduced in the UK in 2000 for Small and Medium-sized Enterprises (SMEs), and two years later for larger companies, as an incentive for businesses to invest in innovation.

There have been two main schemes available to businesses, 1) SME R&D Relief for small and medium-sized businesses and 2) Research and Development Expenditure Credit (RDEC) scheme for large businesses, with a new merged scheme set to take effect from 1st April 2024, having been announced in the Autumn Statement 2023.

The basic principle of the scheme is to reward companies that invest in developing new products, processes or services – or enhancing existing ones – through either a reduction in tax, or a tax credit (cash payment).

There are a broad range of guidelines and conditions which companies need to meet to demonstrate that their projects qualify for relief, and the way you claim that relief will depend on whether you are an SME or a large company. An SME has fewer than 500 employees, and either an annual turnover under €100 million, or a balance sheet total under €86 million.

What projects qualify for R&D tax relief?

The official definition for a qualifying R&D project is one which ‘seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty’ – rather than a project which simply extends a company’s knowledge or capability.

While that definition may seem very specific, it actually means that quite a wide range of project work could be eligible. For example, if your company is looking to develop new products, processes or services, or modify existing products, processes or services, and there is no certainty that such development is scientifically or technologically possible – or you don’t know how to achieve it in practice – then you could be deemed to be ‘resolving scientific or technological uncertainties’, and therefore qualify for R&D tax credits. The HMRC website and the Department for Business, Innovation and Skills give more detailed definitions of scientific or technological advances as well as scientific or technological uncertainties.

It is also worth remembering that under the HMRC research and development definition, R&D doesn’t have to have been successful to qualify, and in some cases (depending on whether a claim is made under the SME or large company scheme) you can include work that you or your company does for a client as well as your own projects.

What costs can I claim for?

If your company and the project both meet the conditions, you can claim tax relief on a range of revenue expenditure (i.e., the day-to-day running costs of the business, not capital expenditure on assets). These include:

  • Staff costs – including salaries, employer’s NIC and pension contributions – for staff actively engaged in carrying out R&D itself (if the employee was only partly engaged on R&D activities, you can only claim for an equivalent proportion of the cost).
  • Expenditure on subcontractors and externally provided workers, again if they are directly and actively engaged in carrying out R&D.
  • Expenditure on materials and consumables – this includes power, water and fuel – that are used up or transformed by the R&D process.
  • Expenditure on computer software used directly in the R&D.

Revenue versus capital expenditure

Many organisations undertake projects to develop bespoke software solutions to meet the unique needs of their business or their customers. In accordance with the general R&D tax credit rules, only expenditure which is classified as ‘revenue’ in nature may be included in any R&D tax relief claim. While expenditure that is classified as ‘capital’ in nature cannot be factored into any R&D claim, R&D capital allowances may be available to accelerate tax relief in its respect.

Specific detailed guidance exists to establish whether an in house software development project is a capital or revenue project and whether expenditure on a project is ‘revenue’ or ‘capital’ in nature. The position will ultimately depend on the facts and circumstances surrounding each particular case.

It is not uncommon that a business may wish to strengthen its balance sheet by capitalising expenditure on developing a bespoke software solution in its accounts. Amongst other criteria, to capitalise expenditure on an internally generated intangible fixed asset in its financial statements, under FRS102 & IAS38, a company must be able to demonstrate the technical feasibility of completing the asset so that it will be available for use or sale. Only costs from the date this and other relevant criteria are met may be recognised as an intangible fixed asset.

However, in contemplating whether or not to capitalise expenditure incurred on developing a bespoke software solution in its accounts, a company should give careful consideration as to how that may impact or interact with any valuable R&D tax relief claim it seeks to pursue.

The overall corporation tax treatment of expenditure on the project must also be considered to ensure any relevant claims and elections are made to access the maximum relief available at the earliest opportunity.

How to claim R&D tax relief

It’s always important to seek expert advice in relation to tax planning and business finance – and you should talk to us as early as you can, to enable you to maximise the benefits available to your business under the scheme. You can also read the HMRC ‘simple guide’ on R&D tax credits for more information.

You must make any claim for R&D tax relief in your company tax return or amended return, and you have up to two years after the end of the relevant accounting period to make the claim. So, for example, if your company has been undertaking qualifying research and development and has not yet claimed R&D relief, you may make a backdated claim within the anniversary of your filing date – generally two years after the end of the accounting period.

Although no additional records are required specifically for the purposes of claiming R&D relief, summary of the R&D project undertaken and explain how it qualifies as research and development, focusing on the advances being sought and the uncertainties faced, rather than just a description of the finished product; you should also include a breakdown of the expenses that qualify for relief.

Additional information form (AIF)

From 8 August 2023, all companies making an R&D claim are required to submit an additional information form (AIF) to HMRC in advance of filing their corporation tax return. Perhaps surprisingly, recent statistics released from HMRC confirmed that almost half of R&D claims received in the first four weeks following the introduction of the additional form did not include the required AIF and the claims were consequently invalid.

As a result, HMRC have begun to issue notices to companies and agents in instances where the R&D claims do not include the necessary AIF. These letters provide information on the necessary actions needed to make a valid R&D claim and are summarised below.

Before you claim

Companies must now submit an AIF before their corporation tax return is filed in order to support any R&D claim. If the AIF has been missed from the submission, there may be time to file an amended corporation tax return together with the AIF, however the information on the form and the return must match. Amendments must be made within 12 months of the filing deadline.

Completing corporation tax returns

In order for R&D claims to be successful, the corporation tax return (CT600) needs to include the following:

  • An ‘X’ in box 657 which shows that the AIF has been sent
  • An ‘X’ in box 656 which shows that a claim notification has been sent for accounting periods on or from 1 April 2023
  • The supplementary page CT600L to be filled in if the company is claiming a payable credit or expenditure credit
  • Computations for the relevant accounting period
  • Accounts for the relevant accounting period
  • Company bank account details

What happens next?

If the R&D claim has not met the necessary criteria, HMRC will remove the R&D claim from the company tax return. HMRC will send the company, and agent where authorised with HMRC, a CT620-COR notice confirming that they have made the R&D correction. This will also show any revised tax calculations that HMRC have made, which could have a significant and detrimental impact on cash flow where payable credits are rejected or corporation tax liabilities increase as a result of excluding the R&D claim.

What to do if you disagree with the CT620-COR notice

You cannot appeal against this notice. However, you can make representations to HMRC via the email address disclosed in their letter. In this representation, the company (or agent) would need to let HMRC know why they believe the notice is incorrect. This needs to be made within 90 days of the date of the notice. HMRC will then consider the representations and let you know of their decision. HMRC will either confirm the notice or withdraw it.

For further information on HMRC’s powers to enquire, read our article: HMRC crackdown on speculative R&D claims.

What should I do next?

The team at Price Bailey has many years of experience working with companies in relation to R&D tax credits, helping a number of clients to secure significant benefits through the scheme. To find out more please contact our team using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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