R&D scheme – key considerations for a successful claim

R&D tax relief is provided by the government for any company with an R&D project which seeks to advance or appreciably improve overall knowledge or capability in a field of science or technology by resolving scientific or technological uncertainties.

HMRC manual CIRD81000 summarises the conditions which must be satisfied for a successful claim. It defines ‘an advance in science or technology’ as:

An advance in science or technology means an advance in overall knowledge or capability in a field of science or technology (not a company’s own state of knowledge or capability alone). This includes the adaptation of knowledge or capability from another field of science or technology in order to make such an advance where this adaptation was not readily deducible.

Work which uses science or technology, but which does not advance scientific or technological capability as a whole is not an advance in science or technology.

So, to identify whether the company may be eligible to claim this valuable relief, you may use this updated step-by-step flowchart.

Once the eligibility criteria are set, the company may be able to claim R&D relief. There are two schemes – R&D tax credits for Small/Medium Enterprise (SME) relief and R&D expenditure credits (RDEC).

For expenditure on or after 1 April 2023 the changes are as follows:

• the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%
• the Small and Medium-sized Enterprise (SME) additional deduction rate will decrease from 130% to 86%
• the SME credit rate for loss-making companies that are R&D intensive (companies spending at least 40% of their expenditure on R&D) will remain at 14.5%
• the SME credit rate for loss-making companies that are not R&D intensive (companies spending less than 40% of their expenditure on R&D) will be cut from 14.5% to 10%.

This ACCA article contains useful examples which explains the impact of the above changes as compared to the previous rates.

Merger proposal of RDEC and R&D SME scheme

On 18 July 2023, the government published draft legislation setting out the design for a merged research and development (R&D) tax relief scheme, applicable from 1 April 2024. However, no decision has been taken to introduce a merged scheme.

Key features of proposed merged scheme

• The proposals set out a single scheme of R&D tax relief, which would apply to all companies which are not loss making R&D-intensive SME companies.
• It is proposed that the merged scheme will operate from 1 April 2024; read a summary of other changes announced for claim processing during 2023.
• The proposed scheme would operate in a similar way to the existing RDEC scheme. The system of relief under the merged scheme would be a taxable ‘above-the-line’ tax credit equal to 20% of the qualifying expenditure
• The loss-making R&D intensive SMEs would be able to continue to claim an additional deduction for R&D expenditure, and where that deduction produces or contributes to a loss, claim a payable credit for that loss. Where a company is loss making, both the current SME and RDEC schemes contain a cap on the amount of credit. The SME scheme stipulates a cap of £20,000 plus three times the PAYE and NIC liability for the period of the claim. The merged scheme proposes to use these SME loss cap rules.
• The merged system would prevent large companies being able to claim R&D tax relief where the work was subcontracted to them by another UK entity. This would support large companies with the current SME rules.
• However, all companies would now be able to claim R&D relief on work they subcontract out to others. This would represent a change for companies claiming under the RDEC, who can currently only claim where the work is subcontracted to a limited number of qualifying bodies, or to individuals.
• The merged scheme incorporates all the recent changes to the treatment of externally provided workers, and these costs will only qualify if they relate to UK workers who are paid through a PAYE scheme. Any payments to self-employed individuals and personal service companies are not qualifiable costs.
• Under the merged system, large companies are not able to claim R&D tax relief where the work is subsidised.

R&D and going concern

Last but not least, as agents are aware, if a company does not meet the condition of being a going concern, then it may not be eligible to claim the R&D relief. At a recent case at First-tier tribunal (FTT), MW High Tech Projects UK Ltd [2024] TC 09011, the taxpayer lost its appeal and the tribunal instead agreed with HMRC that a claim for the research and development expenditure credit (RDEC) was not valid as the company’s accounts show that it was not a going concern at the time of the claim.

This ACCA article summarises the full facts of the court case.