Research & Development Tax Credits

R&D Tax Credits

Introduction

R&D Tax Relief is a government tax incentive designed to encourage innovation in the UK. The regimes for claiming R&D tax credits can vary with the organisation: SME scheme- applicable on legally qualified small and medium sized enterprises, and RDEC- research and development expenditure credit for expenditure that does not fall in the former category.

To qualify and successfully claim the relief, an organisation must be endeavouring to develop a new or an improved product, process, material, service, or device that is representative of advance application of science and technology (details mentioned below) through the resolution of scientific or technological uncertainty.

Features of an R&D Project

1. An R&D project can be carried out by companies for themselves or on behalf of/for someone else. As mentioned earlier, this project could either relate to creating new products, processes, or services, or modifying the existing products, processes, or services for their betterment. 

2. R&D project typically commences in the eyes of law when a project seeks an advance in science or technology. Similarly, it ends when the project’s uncertain elements have been overcome, which means that any commercial marketing or user-testing work beyond overcoming the project’s uncertainties will not be R&D.  Likewise, if the advance has already been achieved but the details are not readily available because, for example, they are reserved as a trade secret, the project would still be available for R&D tax credits.

3. To claim and obtain R&D tax relief, the claimants would have to exhibit and prove in clarity that how a project:

   • looked for an advance in science and technology (by developing something altogether new, or improvising and bettering an existent process or product, or by significantly duplicating an existing process or product using a different method or material, or duplicating a competitor’s existing process or product kept as a trade secret);

   • had to overcome uncertainty (in terms of problems that even knowledgeable employees could not solve without investigation);

   • tried to overcome this uncertainty (arisen due to infrastructural constraints, architectural constraints, cost constraints, or industry-related trends);

   • could not be easily worked out by a professional in the field.

4. These would count and qualify for R&D tax credits: Any costs related to staff (salaries, employer’s NIC, pension contribution, and reimbursed expenses), subcontractors and freelancers, materials, that are used for the development of the project, licenses of crucial software used, and payments made to the subjects involved in the clinical trials, if any.

5. These would not count and qualify for R&D tax credits: Routine copying of the existing products, processes, materials, devices or services, will not qualify for R&D tax credits. Work to improve the cosmetic or aesthetic qualities of a process, material, device, product or service will not itself be R&D. However, work to create certain cosmetic or aesthetic effects through the application of technology can still qualify.

Tax Relief for Failed R&D Projects

According to the government guidelines, the result of an R&D activity need not always reflect in positive to claim tax benefit. Given that it fills the stipulated parameters, even if the results do not quite work out, the government has chosen to reimburse the applicants for innovation and risk-taking. 

Para 10: GUIDELINES ON THE MEANING OF RESEARCH AND DEVELOPMENT FOR TAX PURPOSES: “Even if the advance in science or technology sought by a project is not achieved or not fully realised, R&D still takes place.”

Also, as it is possible to claim R&D tax credit claims with HMRC retrospectively, the claimants have two years from the date of their accounting period to submit one. 

Parting words

Going ahead, HMRC has released its review of R&D tax relief (also known as R&D tax credit), along with details that confirm extra measures will be put in place to end the prevalent abuse of R&D tax relief. The government will publish draft legislation in the summer of 2022 which will subsequently be included in the Finance Bill 2022-23 (and come into effect from April 2023). Amongst others, these are the major changes that would alter the structure mentioned above in this article:

1. According to HMRC, there will be changes to the way in which companies claim R&D tax relief. From April 2023, all claims will have to be made digitally, with the exception of companies exempt from the requirements to deliver a Company Tax Return online.

2. Also, with the onset of April 2023, SME will be limited to claiming a maximum of £20,000 in R&D tax credit, plus 300% of their total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liable for the period.

Companies are exempt from this condition if their staff are creating or managing Intellectual Property (IP), or if they do not spend more than 15% of their qualifying R&D expenditure on subcontracting R&D, or on the provision of Externally Provided Workers (EPWs). 

At Philip Jones Legal we follow the highest standards of legal consulting and litigation. We use a continually-evolving process to prepare R&D tax credit claims that meet HMRC’s high standards – and deliver maximum value to your business. If you’re not sure about your path to successfully getting through the procedure of obtaining R&D tax credits, we are here to help. Contact us at sb@philipjoneslegal.com or call our Head Office on 020 3 573 0860.

Author: Nishant Tiwari (Corporate & Commercial Legal Consultant) of Philip Jones Legal.