The criteria to claim – what do companies need to prove?

The scheme itself requires there to be an advance in science or technology. The definition is slightly wider than it sounds insofar that if an advance is sought, but ultimately not achieved because, say, the project failed, then relief may still be available.  So it’s important to be aware of the unsuccessful projects as well as the successful ones.  This can often mean that where there has been some element of trial-and-error, or failed projects, then R&D could have taken place – and a valid claim can still be made.

A business has to have attempted a project at their own risk by creating new, or enhancing existing, products, services, software or processes. The R&D has to be contained in a specific project and include, for example, identifiable materials and staff costs. It’s also important that, at the outset of the project, a competent professional in that field would not know how to achieve the advance sought.

Finally, for a business to qualify it must be an SME (HMRC definition so must be limited liability and subject to corporation tax). There must be fewer than 500 employees and have either a turnover under €100m or a balance sheet net asset value lower than €86m.

Costs which can qualify

• Staff
• Externally provided workers
• Subcontractors
• Materials and consumables (including utilities)
• Payments to the subjects of clinical trials
• From April 2023 – Data and cloud computing costs

As you can, see there is a wide range of costs which can qualify. Where it is important to examine the projects in detail is when costs do not wholly relate to the R&D project. For example, staff costs are ones which are often seen as the largest relevant expenditure in any given claim. However, it is very unusual for staff to be completely devoted to an R&D activity. Therefore, it is normal to find some time apportionment to calculate the relevant levels of staff costs to be included within the R&D claim.

Examples of typical claims

Whartons Nurseries

A specialist grower and key areas of operation include production, land management, varietal testing and pest control. To bring new products to market they had to develop their own pesticide solutions in-house. These have to not only benefit the plants but also comply with regulations and the desire to preserve nature. Qualifiable R&D activity.

PowerChord

PowerChord has developed a proprietary radio system that can help overcome the problem of poor sound quality often experienced at live events. The technology transmits digital-quality sound (eg. music from a concert) directly to audience members and automatically synchronises this high-fidelity sound source with the ambient sound coming from the venue speaker system.  The research undertaken to develop this capability required a multi-year R&D effort. 

Elgoods Brewery

The untapped territory was sour beer, due to demand in the US, and flavoured wheat beer, due to demand among women in the UK. For those who find their palette a little too delicate for bitter, Elgood’s created wheat beers in the guise of strawberry, raspberry, mango, banana, apple, and cherry.  Yet bringing sour and wheat beer to market wasn’t without discovering ways that didn’t work, before finding ways that did. Elgood’s did not know they were undertaking work HMRC classed as ‘research and development’ (R&D). They’re the first to admit they hadn’t even heard of the government’s valuable R&D tax credits scheme.  “A lot of R&D went into maintaining yeast — particularly over lockdown when we weren’t on site”, they explained.

It’s a fact that many companies miss out on claiming this relief because they and/or their advisers simply do not know about it or they’ve heard about it and incorrectly assume it does not apply to them.  It can be complex to navigate and it’s crucial to be fully aware of what actually are qualifying costs – and what cannot be claimed.

How Relief is given

Once a claim has been prepared for profit making companies the calculation of the benefit is quite simple. The claim gives an additional 130% deduction in respect of the R&D qualifying expenditure. For a £100,000 spend therefore, the company achieves an additional £130,000 in its corporation tax return and saves tax at the corporation tax rate, currently 19% (ie. potentially £24,700 or £32,500 from April 2023).

Where the company is loss-making the situation is slightly different and the company is afforded more choices. The scheme for SMEs allows the company to surrender its R&D related loss for a 14.5% tax credit from HMRC  (ie. HMRC will pay 14.5% of the surrendered loss). The relevant R&D loss includes 230% of the expenditure (ie. the 100% that would already be posted to the profit and loss account and the additional 130% enhanced deduction for tax purposes). Therefore, a loss making company with the same £100,000 expenditure on R&D could be eligible for £33,500 cash paid from HMRC.

Criteria to access the favourable SME scheme

The average claim in the UK is around £55,000, although for start-ups this may be lower. but it is a significant and valuable relief.