Learn how to correctly interpret your work to avoid a missed opportunity to access funds intended to support your business growth.
What is Research and Development tax relief about?
Research and development tax relief/tax credits, is a long-established means to access cash resources provided by the UK Government. The purpose of this tax relief is to subsidise the costs incurred by UK companies seeking competitive advantage with their products, goods and services through innovation.
This relief also covers innovative work in relation to systems reliant on science or technology integral to a product, service, or other business-wide systems and processes that benefit a company’s trade.
How are cash resources made available through research and development tax relief?
Delivered via the UK corporation tax system, cash resources are made available through a reduction in a company’s corporation tax bill (Research & Development Tax Relief) or through a payment of a cash credit (Research and Development Tax Credits).
The form of the relief will depend on whether a company made taxable profits or a tax loss during the year the qualifying project work was carried out.
It is possible that both forms of cash savings will be in point for the same claim period in certain circumstances. Your R&D tax adviser will be able to help you understand this, working with your incumbent accountant/mainstream tax adviser as necessary.
What do I need to do to make an R&D tax relief claim?
There are two elements to an R&D claim:
- Qualifying the claim - demonstrating eligibility criteria have been met; and
- Quantifying the claim - linking allowable expenditure to eligible work.
In this series of articles, I am delving a little deeper into the starting point - the eligibility criteria to qualify your claim.
For more information on allowable expenditure, see FAQ “What is qualifying expenditure for R&D Tax Credits?”. If your company is eligible for this relief then it is the allowable expenditure that ultimately determines the value of the cash/tax benefit received.
The below diagram gives a snapshot of the potential value returned for every £1 of qualifying expenditure identified depending on the scheme and the tax profile of a company:
Introduction to eligibility criteria
Not surprisingly, qualifying for this Innovation Incentive requires numerous conditions to be met, it is a tax item after all!
How your work benefits your trade, how you came to start the project, the boundaries around the type of activities that count, the tax nature of costs incurred, and time limits for claiming - are all eligibility criteria that cover multiple factors, and need to be met by a claimant company.
In this series of articles and supporting material, we’ll look at the areas shown in the above diagram more closely to help bring context and understanding around how they relate to your company and your work.
The eligibility criteria for this tax relief are set out in:
- Tax legislation - Corporation Tax Act (CTA) 2009 (Parts 2 and 3) & CTA 2010 s1138, Income Tax Act 2007 s1006 (as modified by the Department for Business, Energy & Industrial Strategy).
- The Department for Business, Energy and Industrial Strategy (“BEIS”) guidelines on the Meaning of Research and Development for Tax Purposes.
- HMRC Corporate Intangibles Research and Development Manual (“CIRD”) - also publicly available, head to the section for research & development tax relief.
Who needs to understand research and development eligibility criteria?
Everyone involved in assisting with the claim compilation must understand the eligibility criteria, including: business owners, your finance staff, your science and technology staff (aka competent professionals), plus anyone else in your business who will be involved in working with your R&D tax adviser to compile your claim. My article 4 Key Elements of Effective R&D collaboration takes a more in depth look at the roles involved in putting together an effective R&D tax claim.
Understanding the meaning of R&D for tax purposes is key! It underpins the entire substance of your R&D claim when it comes to demonstrating to HMRC how, exactly, your company qualifies for this relief!
The meaning of R&D for tax purposes is set out at a high level, purposefully so, to ensure an extensive application is achieved across all industries - including niche and emerging ventures.
Neither the BEIS guidelines for R&D nor the HMRC CIRD manuals provide a specific and definitive list of qualifying project work, this would be impossible to do and would quickly become outdated.
What qualifies as R&D now may not qualify in a few months’ time (depending on the rate of advancement in your industry). What qualifies as R&D continuously evolves.
The qualification of R&D must therefore come from you, the claimant company. Specifically, the qualification must come from your science/technology staff, based on the current state of play in your industry, at the time you undertook the work.
It is your niche, your specialism and expertise, your pain points, and the significance of the challenge you are facing in seeking to innovate because of limitations or unavailability in solutions for betterment. These aspects are compared to the headline requirements per the BEIS guidelines for R&D to establish whether they are met in your work.
The qualification criteria are interpretive but how they are applied to your work must be backed up and substantiated to HMRC.
The role of an R&D tax adviser is to help the right people in your company understand the meaning of R&D and consider with them how your work can be validated against the qualification criteria.
A good R&D tax adviser will work with your science/technology staff to impart an understanding of what the R&D guidelines require and discuss how your work fits these requirements.
Your R&D tax adviser will be able to ask the right questions, the questions that an HMRC R&D case worker will want to see answered and justified. Together you will be able to surface the facts that determine the significance and challenges of your work and reach a decision as to whether your work meets the qualification requirements.
You will collate facts and evidence to support and validate your efforts against the definition of R&D for tax purposes.
When to start thinking about whether your research and development work qualifies
Ideally you will be thinking about whether your work qualifies as you go along. With a shortened time window to notify HMRC of your intention to make a claim being introduced, it’s definitely worth consulting an R&D tax adviser before your current financial accounting period ends.
The standard time limit a company has to make an R&D tax relief claim is two years from the end of the accounting period in which the qualifying work took place. For example, if your accounting period end date is 31 December 2022, you have until 31 December 2024 to make a claim.
Note that qualifying work can span more than one accounting period and so you could be looking at making more than one claim, for successive accounting periods.
However, from 1 April 2023 (for accounting periods beginning on or after this date), there will be an additional, relatively short time limit in which some companies must also notify HMRC of their intention to claim:
- If you are a UK company that has not made an R&D tax claim for any of your last 3 accounting periods, you will only have 6 months from the end of your year end to notify HMRC that you intend to make an R&D claim. This is quite separate from the statutory two-year time limit for making the actual claim (which will still apply).
- Going forward, it’s worth making time to consider your eligibility as you start projects that could potentially qualify to ensure you do not miss the notification window. You can involve an R&D tax adviser at any point – not just when you are ready to put the claim together.
Take away point: from 1 April 2023 be aware that the “notification” window may also apply in addition to the two-year time limit window. If you fail to notify by then, even if you are in time to claim by reference to the 2-year time limit window, you will not be able to do so!
Involving an R&D adviser early on is not only helpful to consider your eligibility but will also help you to gain knowledge of qualifying activities and associated expenditure. This brings advantages around maximising your claim value and gathering necessary supporting evidence more effectively, which is much easier to do as you go along than retrospectively.
Who research and development tax relief is not available to
If you are not carrying out qualifying work as a company subject to UK Corporation Tax (or work attributable to a company that is a corporate partner of a partnership), then you cannot claim at all – this relief is just for UK companies.
Working with a specialist research and development chartered tax adviser
Copper Tax collaborates with people in businesses, large and small (starting out or established) to put together authentic claims for R&D tax relief.
Working closely with the right people in your company, together I'll identify your qualifying projects and carefully link up associated expenditure to maximise the cash benefits of this tax relief with 100% compliance.
I'll help you understand the eligibility criteria and guide you through a way to assess your work against this. We'll look at the areas where you have incurred costs and how these costs can be attributed to the qualifying aspects of your work.
I'll take the facts we'll gather throughout the assessment process and produce a robust report for submission to HMRC in support of your claim.
Solely focused on R&D tax relief, this tax advisory service compliments the mainstream tax compliance services you buy elsewhere.