Research and Development R&D Tax Breaks

Companies that invent new production methods or products can claim enhanced tax relief for the Research and Development (R&D) costs. The enhanced expenditure scheme for small and medium-sized enterprises (SMEs) increases qualifying expenditure by 130%, so that for every £100 spent, the company enjoys a deduction of £230 from taxable profits.

This may create or increase a tax loss. Where there are no other profits against which a loss generated by R&D expenditure can be set, the loss may be surrendered to HMRC, in exchange for a payable tax credit at 14.5%.

This scheme is particularly useful to start-up companies and those struggling to make profits in their early years. However, it is being amended so that, for expenditure on or after 1 April 2023, the additional deduction will decrease from 130% to 86% and the payable credit rate will decrease from 14.5% to 10%.

It will remain a very attractive tax relief, despite the claims process and conditions being tightened for accounting periods beginning on and after 1 April 2023 as follows:

• The company will need to inform HMRC of its intention to make an R&D claim within six months of the end of the accounting period to which the claim will relate
• The claim must include details of the advances that the company is seeking to achieve and what uncertainties have been overcome in the R&D project
• Costs of overseas workers or subcontractors based outside the UK must be excluded from the claim, with limited exceptions
• A senior officer of the company must endorse the claim
• Any agent that advised the company on the R&D claim must also be named within the claim.

You can ask HMRC for an advance assurance that your company, and its R&D projects, will meet the requirements. We can help you do this.

The main benefit of advance assurance is that HMRC won’t raise further questions about your initial R&D claim or for R&D claims submitted in respect of the next two accounting periods.

You need to apply for the R&D tax relief within two years from the end of the accounting period in which the R&D costs were incurred. So, if your company has been innovative in the recent past, don’t delay your application for R&D tax relief! We can help you with this.

The information in this blog provides only an overview of HMRC guidance and legislation in force at the date of publication and no action should be taken without consulting the detailed HMRC guidance and legislation or seeking professional advice.  Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this blog can be accepted by the firm.