No. The entity claiming must be a corporate that is liable to UK corporation tax.
 

As long as the company has commenced trading and is a going concern then it can claim R&D tax credits. In fact a number of our clients are in the early stages of trading and do claim the R&D tax credit relief.

For accounting periods beginning on or after 1 April 2024, restrictions on overseas subcontractors were introduced. Under the new rules, expenditure in this category can only be included in the R&D claim if the R&D is undertaken in the UK, or if an exceptional circumstance requires the work to be done outside the UK e.g. geographical conditions or regulatory requirements. 

Yes, as long as the project was ongoing during the claimable period and qualifying R&D activities were undertaken then a claim can be made.

Yes, as long as the project was ongoing during the claimable period and qualifying R&D activities were undertaken then a claim can be made. In fact, a claim may be made in the subsequent period if the project was still ongoing at that point. 

Yes, the overall success of a project is irrelevant in terms of making a claim. If anything, a failure may be good in terms of showing the complexities of the R&D project.

A technological uncertainty is where your company is researching or developing something that is not known to be scientifically or technologically feasible when you make or discover it.

This means that your company, or experts in the field, cannot already know about the advance or the way you achieved it. This includes where you have an idea of how the uncertainty may be resolved, but you still have to test the idea and prove whether or not it is feasible.

There is no set percentage or measure to determine whether or not an improvement meets the appreciable test.  Each project will need to be considered on its own merits. However the improvement cannot be merely superficial, cosmetic or an itinerant improvement.

The improvement can be any improvement such as efficiency, selling cost or cost of production.

The projects have to be assessed individually to see if they qualify. They must involve the development of a new or appreciably improved product or process and show an element of technological uncertainty.

HMRC normally take 28 days to process a claim, with any subsequent repayment normally being released within 14 days. This period may be extended if HMRC open an enquiry. 

The quantity of the R&D claim itself will remain unaltered, as this is dependent upon qualifying R&D expenditure. However, HMRC will consider any other outstanding liabilities of whatever nature (PAYE, VAT or any other arrears) which may therefore reduce any repayments made.

There is no choice in the offset. The R&D Tax Credits is a deduction in calculating the trading profits for the company. This is therefore used before trading losses are brought forward.

No, companies can choose how they wish to use any repayment. It is hoped that the repayments will be used for further R&D investment, however, there is no requirement for it to be applied in this manner.

As with any tax relief, R&D Tax Credits can be abolished or reformed as part of the government’s annual budget considerations. However, successive Governments have continually improved the relief, making it more valuable and easier to claim. In our view, it is unlikely that the R&D Tax Credits scheme will be abolished because many other countries have similar regimes and the UK needs to be more competitive than ever in the face of Brexit.

In our experience, it is an advantage being dealt with by one of these specialist units. The inspectors in the units have a better understanding of R&D, so it is easier to explain why your activities are research and development. One of the problems we had prior to the setting up of these units, was having to deal with inspectors who had no understanding or experience in this area. 

In our experience, the transfer does not increase the risk of an enquiry. HMRC have a well-established sampling and risk management system to select cases for enquiries and claiming R&D Tax Credits should not have any effect on this. 

Yes. This is because R&D Tax Credit is a specialised area and HMRC have set up specialist teams around the country. Once the claim has been submitted, the tax affairs of the company will be transferred to the appropriate district; each specialist district deals with a specified industry, for example Cambridge deals with bio/pharma and Cardiff deals with software.

Generally speaking, HMRC raise any enquiries into a claim after the claim is processed. As long as they are within relevant time limits set down by tax legislation, it is possible (but very unlikely) that HMRC could raise an enquiry into a legitimate claim.

No, this is a statutory tax relief. There is no more risk of an enquiry if the claim has been made correctly and relevant supporting information has been submitted. HMRC support this relief and want more qualifying companies to claim.

Enquiries into R&D tax credits tend to be confined to looking at the claim rather than being extended to other areas of the company.

There are many areas of this tax relief which are open to interpretation and most enquiries are merely HMRC seeking a better understanding of the R&D which the company has been undertaking and how the relief has been calculated.

A claim can be made as long as it is within the time limits set down by tax legislation. The time limit for making a claim is two years from the end of a company’s accounting period. For example, a company with a year end of 31 October 2022 has until 31 October 2024 to make a claim.

A claim can also be amended within the same timescale. 

R&D Tax Credits are claimed for each accounting period in which a company undertakes qualifying activities. There is no limit to the number of times a claim can be made.

The claim for R&D Tax Credit is only based on the qualifying expenditure. Turnover does not feature in the calculations. 

R&D Tax credits claimed under the SME scheme should be reflected in the tax charge in the accounts. Any repayments are not taxable income.  

The position for companies claiming under the RDEC scheme is slightly different as the income is taxable upon the company. Any RDEC acts as payment against the tax bill rather than reducing it. 

The legislation is quite complex but broadly speaking the criteria for a company to claim under the SME scheme rather than the RDEC is that the number of full time employees is less than 500 and either a turnover of less than €100 m or balance sheet assets of less than €86 m.

The size is affected by whether the company is part of a group of companies or the shareholders have involvement in other companies. 

Despite the company meeting the SME criteria there may be projects which are ineligible for the SME scheme. This can occur when the company has received a grant that is notifiable state aid under EU regulations or where the company is subcontracted work from a company that is only able to claim under the RDEC.

The SME scheme applies to companies who satisfy the requirements of the small and medium sized enterprise scheme.

The RDEC applies to any company that does not qualify for the SME scheme.

This includes companies who fail to meet the size requirements and therefore can only claim under the RDEC or companies who may have individual projects which do not qualify under the SME scheme if, for example, they are receiving certain grants or they have work subcontracted to them by a company that does not qualify under the SME scheme.

In the latter case, this means that a company that meets the size requirement but has projects that do not qualify can claim under both schemes.

Under the SME scheme, the company receives a second tax deduction for the qualifying costs on top of the normal tax deduction that the company receives through its accounts. The second deduction goes through the company’s corporation tax return and is currently 130% of the qualifying costs. This gives a total effective tax deduction for the qualifying costs of 230%.

The second tax deduction will reduce the taxable profits of the company giving relief at the company’s tax rate, currently 19%.

This means that for every £1 spent the company receives an extra tax saving of 24.7p on top of the normal tax saving of 19p.

If the extra tax deduction is greater than the taxable profits, a tax loss will be created. Normally, a tax loss can be carried back against taxable profits in the previous 12 months or used to relieve taxable profits of other group companies. Any remaining loss is then carried forward to be used against future profits.

With a loss produced by R&D Tax Credits we have the option of surrendering the loss for cash rather than carrying it forward. The rate of surrender is less than the rate received if the loss is carried forward, 14.5% rather than 19%, but most companies prefer to have a lower amount of cash sooner rather than a higher amount later.

The loss that can be surrendered is restricted to the loss relating to R&D not general trading.

The legislation is quite complex but broadly speaking the criteria for a company to claim under the SME scheme rather than the RDEC is that the number of full time employees is less than 500 and either a turnover of less than €100 m or balance sheet assets of less than €86 m.

The size is affected by whether the company is part of a group of companies or the shareholders have involvement in other companies. 

Despite the company meeting the SME criteria there may be projects which are ineligible for the SME scheme. This can occur when the company has received a grant that is notifiable state aid under EU regulations or where the company is subcontracted work from a company that is only able to claim under the RDEC.

The SME scheme applies to companies who satisfy the requirements of the small and medium sized enterprise scheme.

The RDEC applies to any company that does not qualify for the SME scheme.

This includes companies who fail to meet the size requirements and therefore can only claim under the RDEC or companies who may have individual projects which do not qualify under the SME scheme if, for example, they are receiving certain grants or they have work subcontracted to them by a company that does not qualify under the SME scheme.

In the latter case, this means that a company that meets the size requirement but has projects that do not qualify can claim under both schemes.

This does depend upon the contractual relationship between the companies. Expenditure may need to be claimed under the RDEC scheme as opposed to the SME scheme.

This can be an extremely complex area and does depend upon the contractual relationship between the company and subcontractor and assessing where the risk lies. It may be that both companies can claim if there is a collaborative effort. 

A subcontractor is someone who undertakes specialist activities in relation to the R&D on behalf of the company claiming R&D Tax credits.

Externally provided workers are staff employed by the company through an employment agency but also includes staff supplied by another related or group company.

For R&D purposes the relief on the costs is the same, relief is restricted to 65% if they are unconnected or 100% if they are connected or an election is made to treat them as connected. 

Unconnected means the subcontractors are at arm’s length and there is no relationship between the companies or shareholders.

Connected parties includes companies who may have common shareholders/control or are in a group relationship. 

Relief on unconnected subcontracted costs is restricted to 65%.

If the company and the subcontractor are connected, the actual costs of the work undertaken by the subcontractor can be claimed.

If an unconnected subcontractor is willing to disclose the actual costs of the R&D, both parties can elect to be treated as if they are connected.