This Content Was Last Updated on November 23, 2023 by Jessica Garbett
R&D Tax Credits are of frequent interest to a small company in technology related environments.
Update – there were some proposed changes to R&D in the Autumn Financial Statement 22nd November 2023, with the SME and large company schemes to be merged from April 2024. Check with HMRC for latest details.
How do they work, and what can be claimed?
HMRC has some comprehensive guidance at: Claiming Research and Development tax reliefs and it would be foolish to try and repeat that here. Instead we will address the “headlines”
What counts as R&D?
First, what counts as R&D? HMRC state “Your company or organisation can only claim for R&D Relief if an R&D project 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 – and not simply an advance in its own state of knowledge or capability.”
They also state “It’s not enough that a product is commercially innovative. You can’t claim in respect of projects to develop innovative business products or services that don’t incorporate any advance in science or technology.”
There are two R&D schemes operating, the SME scheme and the large company scheme. The thresholds for the SME scheme are quite high, so most businesses will qualify under both schemes and can choose to use either. Read more on HMRCs site.
What costs qualify?
Assuming the project qualifies the next question is what costs qualify? Again, referring to HMRC:
- Employee costs – that is, employing staff directly who are actively engaged in carrying out R&D itself. The staff must be employed under a contract of employment directly with your company or organisation – not consultants, agency workers, or staff/directors whose contracts of employment are with other companies. However, these others may qualify under either the rules for staff providers or subcontractors.
- Staff providers – paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D. The staff provider needs to contract with the individual whose services they supply – not through another person.
- Materials – consumable or transformable materials used directly in carrying out R&D. These are actual physical materials that are consumed in the R&D, and not things like telecommunication or data costs.
- Utilities – power, water, fuel used directly in carrying out R&D, but not things like telecommunication costs and data costs.
- Software – computer software used directly in the R&D.
- Subcontracted R&D expenditure – if your company or organisation is claiming relief under the SME Scheme, then you may be able to claim back 65 per cent of what you spend on certain R&D activities carried out for you by a subcontractor. But if the subcontractor is connected to your company or organisation, or you have jointly elected for connected parties treatment, special rules apply. If your company or organisation is not a SME, you can only claim expenditure on activities that are undertaken directly on its behalf by certain specific kinds of subcontractor.
- Capital expenditure – Although R&D Relief is only available for ‘revenue expenditure’ (generally, day-to-day running costs, as opposed to capital expenditure), if you are involved in R&D and you spend money on capital assets, you may be able to claim R&D capital allowances.
If you own a business and are considering a R&D claim, a couple of pointers to be aware of:
- Dividends are not eligible payroll costs – so where directors have a low salary/high dividend mix, this will need to be switched to salary.
- R&D claims are a hot area for consultancy sales, sometimes with less eithics than desirable – do check the credentials of anyone advising you.