The UK is home to world-class research and development (R&D) facilities and institutions that are engaged in cutting-edge research in a range of fields, from technology and science to engineering and medicine. The government invests heavily in R&D every year, with a particular focus on innovation and the commercialization of research to drive economic growth and ensure the UK remains competitive on the global stage.

In recent years, the UK has made significant efforts to attract and retain talent in the field of R&D. This includes initiatives such as the Research and Development Roadmap, which outlines the government’s plan to increase R&D spending to 2.4% of GDP by 2027, and the Global Talent Visa, which allows exceptional researchers and scientists to come to the UK to work and conduct research.

The COVID-19 pandemic has placed a renewed focus on R&D in the UK, with government funding being directed towards research into vaccines, treatments, and diagnostics for the virus. This has led to breakthrough developments such as the Oxford-AstraZeneca vaccine and new treatments that have the potential to save lives and transform the way we manage the pandemic.

Overall, the UK’s R&D sector is a vital component of the country’s economy, driving growth and innovation across a range of industries and sectors. Its reputation for producing world-class research is well established and looks set to continue in the years to come.

Qualifying R&D expenditure

FRS 102 defines ‘research’ as ‘original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding’. ‘Development activity’ is defined as ‘the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use’.

R&D Relief in the UK on qualifying expenditure

It is an incentive scheme introduced by HMRC back in 2000 to help UK companies subject to corporation tax designed to encourage investment in the UK toward various innovative process or products using science or technology. It is delivered through the tax system by either reducing you corporation tax payable or even generating cash refund for loss making companies.

There are two types for reliefs: the small and medium size enterprise (SME) scheme or the R&D expenditure (RDEC) scheme for the companies that does not qualify under that SME scheme.

Meaning of SME and large companies for R&D

To qualify as an SME, the company must be independent and have:

• no more than 500 staff, and either:
• an annual turnover of no more than €100m, or
• an annual balance sheet figure of no more than €86m

These thresholds are twice the thresholds for the EU definition of an SME, but this doubled threshold applies only to R&D reliefs, so that a company may be an SME for R&D relief purposes but a large company for all other purposes.

Moving between an SME and a large company ― period of grace

The SME threshold tests above are taken at the year end of the company. If the threshold is exceeded at the end of the year, a company will not automatically become a large company for R&D relief purposes as there is a year of grace. A company will only become large when the thresholds are exceeded for a second consecutive year. The reverse applies when a large company becomes an SME, see the Example 1 which illustrates this.

The year of grace is not applied in some situations where there are linked or partner enterprises, for example where a large company or group acquires an SME.

SME R&D tax relief

An SME incurring qualifying R&D expenditure can claim an additional deduction of 86% (130% for expenditure incurred prior to 1 April 2023) of the relevant costs incurred in calculating its taxable total profits, giving a total deduction of 186% (previously 230%) of the original costs.

If the SME incurs a trading loss in the period in which R&D tax relief has been claimed, it can surrender all or part of that loss for a tax credit of 10% (prior to 1 April 2023 the repayable credit rate was 14.5%), which is subject to a cap linked to the company’s total PAYE and NIC costs for accounting periods beginning on or after 1 April 2021.

Further details of SME R&D tax relief and the amount of the surrenderable loss please seek expert advice.

Large company R&D tax relief

Large company R&D relief takes the form of an RDEC which is 20% (for expenditure on or after 1 April 2023, 13% for expenditure on or after 1 April 2020) of qualifying expenditure. RDEC is a taxable credit which can be used to discharge a company’s liability to corporation tax.

Recent Development

• As part of the Autumn Statement 2022, the Government announced changes to the rates of the R&D tax reliefs for companies which will apply to expenditure incurred on or after 1 April 2023. It should be noted that as the majority of the changes apply to accounting periods beginning on or after 1 April 2023, the commencement of the rules will differ depending on the company’s accounting period end
• Further changes to the R&D regime were announced as part of Spring Budget 2023. These included a one-year delay to the proposed restrictions on certain overseas qualifying expenditure (now due to take effect from 1 April 2024, rather than 1 April 2023), changes to some of the administrative requirements in making a claim and increased tax relief for loss-making R&D intensive SMEs.
• The requirement to provide additional information will need to be made using a compulsory additional information form. This requirement will apply to any claim made on or after 1 August 2023 (and irrespective of whether that claim relates to an accounting period beginning before 1 April 2023).
• Two new categories of expenditure qualifying for relief will be introduced. These are the costs of data licenses and cloud computing services. Amendments are also to be made to the patent box legislation, which applies the R&D definitions of qualifying expenditure in its calculations, to include data and cloud computing costs.

If you want to make more of these tax reliefs, get in touch with our team and discover how we can help.

Raisul Ferdous (Ray) BSc (Hons) | MBA | ACCA

Accounting, Tax & International Relations Manager  

Reference:

1. Autumn Statement 2022 para 5.52, https://www.gov.uk/government/publications/autumn-statement-2022-documents
2. Overview of tax legislation and rates (March 2023) paras 1.27, 2.10, 2.11; Spring Budget 2023: Overview of tax legislation and rates (OOTLAR) – GOV.UK (www.gov.uk)
3. Reform of Research and Development Tax reliefs Opens in a new window; https://www.gov.uk/government/publications/spring-budget-2023-overview-of-tax-legislation-and-rates-ootlar
4. Additional tax relief for Research and Development intensive small and medium sized enterprises Additional Tax Relief for Research and Development intensive small and medium sized enterprises – GOV.UK (www.gov.uk)
5. CTA 2009, ss 1119–1120