Additional Tax Relief for R&D Intensive SMEs

At the 2022 Autumn Statement the Chancellor announced that, as part of the ongoing R&D tax reliefs review, the government would reform the R&D tax relief system.

As part of these reforms, for expenditure from 1 April 2023 the Research and Development Expenditure Credit (RDEC) rate would increase from 13% to 20%, the small and medium enterprise additional deduction rate would reduce from 130% to 86%, and the SME payable credit rate would decrease from 14.5% to 10%.

In the Spring Budget, a promising new initiative was announced to bolster research and development efforts among loss making SMEs. The proposal, affecting expenditure made on or after 1st April 2023, is designed to incentivise SMEs investing significantly in qualifying R&D activities by offering to retain the payable tax credit of 14.5% instead of the new reduced 10%. This article explores the key features and implications of this additional tax relief for R&D intensive SMEs and outlines the steps companies can take to make the most of this opportunity.

Understanding the New Rules

The additional tax relief for R&D intensive SMEs was announced after concern was raised in the industry following the announcement in autumn 2022 that the government would be reducing the payable tax credit of the SME scheme. This additional support aims to encourage innovation and stimulate economic growth by offering enhanced tax incentives to loss making SMEs that heavily invest in R&D. The initiative is set to augment the R&D tax credit framework and strengthen the UK’s position as a hub for technological advancement and innovation.

R&D Intensity Definition

A fundamental aspect of the proposal is the introduction of a R&D intensity definition, which determines a company’s eligibility. R&D intensity is calculated as the ratio of a company’s qualifying R&D expenditure for a specific period to its total expenditure for the same period. Total expenditure is calculated from the total expenses figure in the profit and loss (P&L) account, adjusted by adding any expenditure used under s1308 Corporation Tax Act (CTA) 2009 and subtracting any non-deductible expenses for CT purposes. SMEs will be eligible for the additional tax relief if their R&D intensity is 40% or higher during the relevant period.

Companies will be required to indicate their eligibility as an R&D intensive company on the additional information form which was introduced in August 2023. This step ensures that the application process remains straightforward and streamlined for SMEs.

Key Highlights of the R&D-Intensive Additional Relief

Enhanced Tax Credit: SMEs investing more than 40% of their costs in qualifying R&D activities will be eligible for an increased payable tax credit of 14.5%, instead of the new and reduced 10%. This boost in the tax credit aims to provide a substantial financial incentive for SMEs to allocate a larger portion of their budget to R&D initiatives. The enhanced duction will remain at 86%.

Applicability: The additional relief will apply to expenditure incurred after 1st April 2023, aligning it with the new financial year. This means that only R&D expenses accumulated from this date onward will be eligible for the R&D intensive tax credit.

Claiming Process: SMEs can claim this tax credit in the same manner as current R&D tax credits, making it accessible and easy to navigate. However, it’s important to note that the legislation for this scheme is not yet in place, and as such, SMEs have two options: they can either delay their claim until the scheme is operational or claim the current scheme with the reduced 10% tax credit and subsequently amend it to the higher credit once the legislation is established.

The Impact of Potential Scheme Merger

The proposed merger of the SME and RDEC schemes adds an element of uncertainty to the future of the additional relief for R&D intensive SMEs. It remains unclear whether this initiative will be affected by the proposed consolidation of these two programs. SMEs interested in benefiting from the enhanced tax credit should keep a close watch on updates regarding this matter.

The additional support for R&D intensive companies offers a significant opportunity for SMEs to boost their R&D efforts and subsequently enjoy an increased payable tax credit of 14.5%. By focusing on R&D intensity, the government aims to reward companies that prioritize innovation, fostering economic growth and technological advancement in the UK. SMEs should carefully consider their options, including when to make a claim, and stay informed about any potential changes related to the proposed merger of R&D tax credit schemes.

Demystifying Indirect R&D Activities

Navigating the intricate world of Research and Development (R&D) tax relief can be a daunting task for businesses and accountants alike. As the regulations evolve, understanding the nuances of indirect activities has become crucial for maximizing tax relief claims.

With the introduction of the additional information form for R&D claims on 8th August, businesses are now mandated to separate their direct and indirect R&D activity costs. This adds a layer of precision to R&D tax relief claims, highlighting the importance of a robust and accurate process for compiling your claim.

Defining Direct and Indirect Activities

First and foremost, let’s distinguish between direct and indirect R&D activities. Direct activities encompass the creation or adaptation of software, materials, or equipment aimed at resolving scientific or technological uncertainties. This includes scientific or technological planning, design, testing, and analysis. Importantly, these activities must exclusively serve R&D purposes.

HMRC does acknowledge certain indirect activities that are integral to R&D projects can qualify as R&D under the scheme. These activities support the overall project but may not directly contribute to resolving scientific or technological uncertainties. These activities are a key area to consider for R&D tax claims and in some instances may make up a majority of your claim.

Qualifying Indirect Activities

So, what qualifies as an indirect activity? According to HMRC guidelines, it encompasses a broad spectrum of supportive endeavours, including:

  • Maintenance, Security, and Administration: These activities ensure the smooth operation of R&D projects. Keeping your facilities secure and maintaining R&D equipment is essential.
  • Finance and Personnel: Accounting, payroll, and other financial and HR activities that directly pertain to R&D projects can be claimed.
  • Ancillary Activities: Activities such as hiring staff, leasing laboratories, or maintaining equipment, including computers used for R&D purposes, are considered qualifying indirect activities.
  • Training: Any training necessary to support R&D projects can be claimed.
  • University Research: Research conducted by students and researchers at universities is eligible for R&D tax relief.
  • Methodology Development: Research to devise new scientific or technological testing, survey, or sampling methods, when not R&D in itself, can still contribute to your R&D tax relief.
  • Feasibility Studies: If they help shape the strategic direction of a specific R&D activity, feasibility studies can be claimed.

Non-Qualifying Indirect Costs

However, not all indirect costs are qualifiable. Costs related to transportation and carriage, production of goods and services, or non-technical or non-scientific aspects of a new product or process (e.g., aesthetics) are not eligible for R&D tax relief. It is important to understand what costs do not qualify in order to ensure the legitimacy of your claim.

In conclusion, understanding the intricate landscape of indirect R&D activities is paramount for businesses and accountants aiming to optimize R&D tax relief claims. By identifying and segregating direct and indirect costs accurately, businesses can unlock the full potential of R&D tax relief, fostering innovation and driving their bottom line.

Given the complexity of R&D tax relief claims and the ever-evolving regulations, engaging an experienced R&D tax advisor can be a wise strategic move. Their insights can help ensure that your company maximizes its R&D tax relief entitlement while staying compliant with HMRC guidelines. So, whether you’re a business venturing into the R&D tax relief arena for the first time, an experienced user of the scheme, or an accountant aiming to expand your knowledge, expert guidance can make all the difference.

If you would like to understand more about the difference in direct and indirect activities, and would like to discuss your own claim, please do get in touch with our expert team who will be happy to help.

Meriden MP Saqib Bhatti MBE Visits Our Office to Discuss R&D Tax Relief Schemes

We are delighted to share an exciting update – the visit of our local MP Saqib Bhatti MBE.

Last Friday 8th September, our team had the pleasure of hosting Mr. Bhatti for a discussion on the intricacies of the Research and Development (R&D) tax relief schemes and navigating HMRC, a topic close to his heart as a chartered accountant with his family accountancy practice based in Birmingham.

Our company was founded on the principle of supporting UK Plc by nurturing innovation and assisting our clients to recover some of their costs via the HMRC R&D schemes. We firmly believe that innovation requires a willingness to take risks and we want to support companies that have the courage to do so. We welcomed the opportunity to convey our passion for the scheme and its role in fostering innovation. We are thankful that he shares our perspective on the scheme’s pivotal role in promoting and supporting innovation throughout the UK.

The focus of our conversation primarily revolved around the challenges that businesses are currently facing when engaging with HMRC in relation to R&D tax relief claims. Here are some of the key points that were discussed:

Guilty Until Proven Innocent: One major concern is that many businesses are feeling they are being accused of wrongdoing by default. HMRC’s approach presumes inaccuracy of legitimate submissions rather than supporting and assisting businesses with their investments and furtherment of their R&D innovations.

Small Business Struggles: SMEs, in particular, are finding it difficult to navigate the complexities of R&D tax relief schemes. The time, expense and effort required to contest HMRC decisions can be prohibitively high, leading many businesses to reluctantly concede or withdraw their legitimate claims rather than fight for the funds they are entitled to. This results in HMRC interpreting these withdrawals as being fraudulent and recorded as such. We believe this is fundamentally skewing HMRC’s conclusions regarding the volume of claims seen as non-compliant. Smaller claims appear to be targeted by HMRC, as they appear to be ‘easy pickings’ in terms of the number of claims being overturned by the HMRC team and operating businesses need to make commercial judgments, which all too often means they are forced to concede.

Scheme Changes: The recent changes in the schemes favour large companies. They will see their benefit increase by 50%, while small businesses will see their benefit reduced, by as much as half.

HMRC’s Role: There was a consensus that HMRC has not adequately managed the R&D tax relief scheme. While they have promoted it as government support to encourage innovation, HMRC have openly admitted the service provided to R&D specialist advisors and client businesses has been extremely poor.

Discouraging Innovation: The onerous compliance checks and perceived adversarial stance of HMRC are discouraging innovation within the business community. This is counterproductive to the very purpose of the R&D tax relief schemes.

Inexperienced Caseworkers and Out of Date BEIS Guidelines: Another noteworthy issue that surfaced is the recent influx of some 300 new HMRC caseworkers who at HMRC’s own admission lack comprehensive training, prior experience with the R&D tax relief schemes, and scientific or technological knowledge. This has led to instances where caseworkers disagree with competent professionals in the field, resulting in the rejection of claims. This is further exacerbating the challenges faced by businesses seeking legitimate relief under the scheme. HMRC will not speak via telephone or Teams/Zoom and they will only appoint a technically qualified caseworker when the case is escalated to Alternative Dispute Resolution (ADR). We fail to understand how non-technical and poorly trained workers can have the power to reject claims

The welcome news is that Saqib Bhatti MBE is aligned with our mission. He has not only understood our concerns but has also agreed to engage with relevant ministers and colleagues who may be able to address these issues. This is a significant step toward fostering a more innovation-friendly environment for businesses in the UK.

As we look ahead, we remain hopeful that our discussions with Mr. Bhatti and the support of like-minded individuals will lead to positive changes in the way R&D tax relief schemes are managed and perceived. Thank you for being a part of our journey, and we look forward to keeping you updated on further developments in this important endeavour. Together, we can continue to champion innovation and progress for UK Plc.