Navigating Research & Development (R&D) tax credits for tech businesses

Making an R&D tax credit claim is one way of helping to maintain a positive cashflow in times of economic uncertainty.

14 August 2023 - Tyler Hursey

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)

Qualifying expenditure £100,000 £100,000 £100,000
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 hello@scruttonbland.co.uk or phone him on 0330 058 6559.

 

 

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