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Financing your developments using R&D incentives

15 August 2021

Linda Eziquiel dispels some myths myths surrounding UK government Research & Development Incentives – R&D tax credit and R&D tax relief – and ofers an overview of the schemes. 

There are two main UK R&D tax relief schemes – both of which give money back through a company’s annual corporation tax return submission. Smaller companies with under 500 employees can claim more generous Small and Medium Enterprise (SME) R&D tax relief and tax credit. Larger companies with over 500 employees claim RDEC (Research and Development Expenditure Credit). 

Both incentives are only relevant to UK Registered Limited companies. They don’t apply to LLPs or Registered Charities. The SME R&D scheme pays out between around 18% and 33% of qualifying R&D expenditure, while the RDEC the benefit is around 10% of qualifying R&D expenditure.

The benefits are created by enhancing qualifying R&D expenditure  so they directly link to how much a company has spent on R&D. In the case of SME claims, the enhanced value becomes an additional deduction for the purpose of calculating a company’s trading profit or loss for the year – a bit like double counting your R&D expenditure except it’s more than double counting as the R&D enhancement rate is expenditure x 130%. 

Qualification checks 
To claim SME R&D tax relief/credit a company must have fewer than 500 employee and meet at least one of the following in the relevant claim/tax year – have under 100m Euros turnover or have under 86m Euros on its balance sheet. However, if the company is part or fully owned by another company, or partly or fully owns another company, further analysis is needed to determine which scheme the company comes under as there are some aggregation rules for groups of companies.

What activities qualify?
It’s not possible to give a simple summary of what does and does not qualify and it is often making assumptions about qualification that results in some companies ruling themselves out, when what they do does qualify.  

Qualifying research and development usually involves innovation, so a company is more likely to qualify if it is investing brain time, talent and other resources into developing something, it can be a new or appreciably improved product, process or service.  However, just setting out to develop something isn’t enough, there must be some complexity involved. For example the project many include undertaking a technical option appraisal, or prototyping, or trials and testing to work out the best way to get the desired outcome. Or it might be a question of feasibility, in that it’s not actually known whether it is scientifically possible or technologically feasible to do what you want to do, until you try. This is referred to as ‘Making and advance in knowledge or capability in a field of science or technology’.  

There is a specific definition of science for the R&D schemes – science is defined as ‘the systematic study of the nature and behaviour of the physical and material universe’. 

So a project will only qualify if it links to the world of the physical sciences – biology, chemistry and physics – and/or it involves innovation in technology software or hardware development. In reality, that means that quite a lot qualifies.

R&D tax relief guidance includes the concept of a Competent Technical Professional (CTP) in the relevant industry and sector and HMRC expects the CTP to be involved in assessing what was done that was R&D. It is not sufficient to leave that judgement in the hands of accountants, or even specialist R&D advisors. Specialist R&D advisors can guide and help the CTP to come to the correct judgement, but they should not take on that work. By definition the CPT needs to have sufficient knowledge and experience and/or qualifications to demonstrate that they are competent to make the judgement. 

Making a claim
To make an R&D claim that complies with HMRC guidance two things are needed:

• A written document (referred to as a Technical Justification) describing a sample of the most costly R&D projects in the claim, up to ten projects.
• A financial summary giving the total R&D expenditure/cost being claimed plus a cost breakdown for each type of qualifying cost and a total cost per project for projects described in the technical justification document.

The technical justification does not need to be War and Peace, but it does need to address the key factors that prove the project qualifies as R&D under relevant HMRC guidance. The main points to address include:

• What scientific or technological knowledge or capability existed at the start?
• What ‘advance’ was aimed for that built on that knowledge or capability?
• What ‘scientific or technological uncertainties’ (complexities) were faced, 
making R&D necessary?
• What was done, what was the outcome?
The R&D expenditure summary should include the total amount of R&D expenditure being claimed; the total expenditure per project for the largest projects; and the total cost per qualifying R&D cost category.

The main cost categories are:
• Staff salaries (100% of time on R&D – Gross Salary+NIC+Pension - for staff doing R&D).
• Subcontractors (65% of the actual cost of outsourced R&D activities.
• Agency staff (65% of the cost invoiced for the portion of staff time on R&D).
• Materials/consumables (100% of materials and energy consumed by R&D activities).


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