Research & Development. It’s what other companies do. Right? You might be surprised to learn that what you’ve been doing is actually classed as R&D.
Many smaller companies carry out Research & Development without realising that their activity could bring them within the scope of the R&D tax regime. This matters because R&D tax relief is particularly generous for small and medium-sized businesses.
There are two main R&D tax reliefs:
- Small and Medium-sized Enterprise (SME) R&D relief
- Research & Development Expenditure Credit.
SME R&D relief can provide an enhanced 130% deduction against taxable profits for qualifying R&D expenditure. This is in addition to the expenditure involved – making a total deduction of 230%.
Research & Development Expenditure Credit is potentially available to larger companies, and SMEs in particular circumstances. This allowance enables a company to claim a tax credit calculated at 13% of any qualifying R&D spend.
Data and the cloud included in qualifying R&D expenditure
From next April, qualifying R&D expenditure will also include specific data and cloud costs. For example, licence payments for datasets, and cloud computing costs attributable to computation, data processing and software.
There are also measures to refocus the reliefs toward innovation in the UK. This will restrict some costs for R&D activity carried out overseas.
Research & Development for tax purposes
Not every activity described as R&D in commercial language will count as R&D for tax relief purposes. To be eligible for tax relief, the activity must be eligible to be accounted for as R&D under generally accepted accounting practice. It must also conform to definitions set out in BEIS Guidelines.
Qualifying projects are those which endeavour to make an ‘advance in science or technology’ through the ‘resolution of scientific or technological uncertainty’.
Subtle technical distinctions between scenarios do apply. For example, a ‘technical uncertainty’ that could be readily resolved by a competent professional in that field would not count. An ‘advance in science or technology’ must be one that has a bearing on the overall capability in a particular field. It cannot relate solely to the individual company’s own knowledge or capability.
R&D fraud and compliance
Understanding where your company sits in regard to R&D activity also matters for another, potentially serious reason. There is increasing concern from the government about R&D claim errors and fraud. Such errors can arise, for example, when claims are made through unregulated, so-called R&D ‘specialist’ firms. Many of these operate by obtaining tax refunds for R&D activity that is found not to be robust enough to pass subsequent HMRC checks.
Legislation is being set out to improve R&D compliance and we anticipate various changes to the claims process. From April 2023, most claims will be made digitally, with additional detail required. Claims will need to be endorsed by a named senior officer of the company and, where an agent has advised on the claim, their details must also be provided. Given the increased scrutiny from HMRC and upcoming legislation, it is essential to ensure that claims are watertight.