The government offers tax incentives to companies who conduct R&D in order to promote innovation and technical improvement. Businesses that spend money on qualified R&D projects can deduct up to 150 percent of those costs from their taxable income, which lowers their overall income and promotes innovation.
Research & Development (R&D) tax relief can provide valuable financial support if you are a business that is investing in innovation and developing new processes, products or services. However, a series of recent reforms to the rules means that understanding exactly how the R&D tax relief regimes work and when the many different changes come into force may be of critical importance to your financial projections.
The government has a target to raise investment in R&D to 2.4 percent of UK GDP by 2027. R&D tax relief contributes to that goal by reducing the cost of innovation for UK companies and the Government wants to make it more effective to increase “additionality” – the extra R&D spend that companies claiming the relief make. It is also introducing changes to the claims process in order to tackle errors and suspected abuse of the R&D tax relief regime – see above.
As of April 2024, the two separate RDEC and SME tax credit schemes will be merged, both to streamline the relief and help control its overall cost.
The post tax RDEC/Merged scheme rates from 1 April 2023 will vary depending on the level of taxable profits a company has and corporation tax rate applied to those profits. The Net RDEC at the main rate of CT (25%) is 15%, for the small companies rate (19%) is 16.2% and for companies paying tax in the marginal rate band (26.5%) is 14.7 percent.
Additionally, businesses that incur a loss on their research and development are those whose qualifying R&D spending accounts for at least 40% (as of 1 April 2023) or 30% (as of accounting periods beginning on or after 1 April 2024) of their total expenditure (as needed to be spread across accounting periods). The entire amount of expenditures for this purpose will be computed by adding any amount of expenses utilized under s1308 Corporation Tax Act (CTA) 2009 and deducting any amount not deductible for CT purposes. This will be done by starting with the total expenses figure in the profit and loss (P&L) account.
In addition to the above listed factors, not all R&D expenses can be written off at the time of incurrence. Costs that span a period of time, such employee bonuses, must be allocated using the accruals method. To make sure you apply the right rates of relief, you must perform a split period calculation for R&D costs if your year-end falls on or around April 1st for the tax years 2022–2023 and 2023–2024. If a blended rate of relief doesn't substantially affect your claims, HMRC may accept it in certain situations when allocating expenses is difficult. It has been confirmed that the repayable credit available under the merged scheme will be based on the more generous PAYE/ NIC cap rules under the existing SME scheme Read more on the SME cap.
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