The past few years have seen huge advances for tech business systems and processes, not least because of changes to the business environment caused by the pandemic. However, inflation, a shortage of skilled labour and the current economic difficulties mean than many companies in this sector now face a tougher reality going forward. Tyler Hursey, Tax Adviser, explains how R&D tax credits work and outlines who may be able to make a claim.
The UK tech industry is renowned for its entrepreneurial activities, with exciting new technology being developed daily. The UK’s R&D tax incentives for small and medium enterprises (SMEs) and large companies are designed to foster this type of innovation and encourage greater R&D spending.
The R&D tax credit scheme works by reducing a company’s corporation tax bill or, if the company is lossmaking, be allowing the loss to be surrendered in return for a repayable tax credit.
The last Budget saw R&D relief for SMEs reduced from 130% to 86% and the R&D repayable tax credit reduced from 14.5% to 10%. Despite this, the government maintains that it remains committed to supporting R&D by declaring that the reduction in the R&D repayable tax credit will not apply to SMEs who dedicate at least 40% of their expenditure to qualifying R&D costs. These businesses will continue to benefit from the higher R&D repayable tax credit of 14.5%.
Example – Company with £100,000 of qualifying R&D expenditure:
|Prior to 1 April 2023||From 1 April 2023||From 1 April 2023
(R&D intensive companies)
|Enhanced deduction||£130,000 (130%)||£86,000 (86%)||£86,000 (86%)|
|Corporation Tax relief on the enhancement||£24,700||£16,340||£16,340|
|Repayable Tax Credit||£33,350 (33.35%)||£18,600 (18.6%)||£26,970 (26.97%)|
R&D for tax purposes takes place when a project is undertaken which seeks to achieve an advance in a field of science or technology. For example, recent R&D projects we have been involved with include:
- the development of fully bio-degradable plastic components;
- the design of complex, market-facing blockchain software; and
- construction and implementation of a bespoke Enterprise Resource Planning (“ERP”) system.
To make an R&D claim you need to explain how a project:
- looked for an advance in the field
- had to overcome the scientific or technological uncertainty
- tried to overcome the scientific or technological uncertainty
- could not be easily worked out by a professional in the field
Your project may research or develop a new process, product or service or improve on an existing one and it is worth remembering that a project doesn’t need to succeed in order to qualify for R&D tax credits!
It sounds simple but R&D claims can be complex and since the introduction of the new R&D anti-abuse unit in the Autumn 2021 Budget, HMRC is opening longer and more forensic enquiries into R&D claims and levying increasingly severe fines and penalties where mistakes are made. In addition to this, from 1 August 2023 all R&D claims now have to be made digitally and be accompanied by a large amount of compulsory additional information. It is therefore increasingly important to take professional advice to ensure that as well as maximising the potential tax credit, your R&D claim is robust and will stand up to HMRC scrutiny.
How Scrutton Bland can help
Our R&D experts will spend time getting to know your business and discussing your overall R&D strategy. We will provide clear, straightforward advice in relation to the feasibility of your R&D claim and work with you to optimise your tax position.
Our team will prepare a detailed report for you, oversee the submission of the approved R&D claim to HMRC and deal with any subsequent correspondence, enabling you to focus on your day-to-day operations.
There’s more information on R&D claims on our website. If you would like to talk to Tyler about R&D tax claims, please don’t hesitate to email him at email@example.com or phone him on 0330 058 6559.