Businesses may claim revenue-based expenditure for staff costs, utilities, consumables, software licences and some third-party expenses. For accounting periods starting on or after 1 April 2023, claimants may also include expenditure incurred on cloud computing and data licences. Relief cannot be claimed on items of a capital nature, such as the purchase of plant and machinery, although R&D capital allowances may be available. Development costs capitalised as intangible assets may potentially be eligible to the extent they are revenue in nature for R&D tax purposes.

The amount of the benefit and the way it is calculated differs depending on the size of your company. Large companies can receive a 13% credit of eligible expenditure (20% for expenditure incurred after 1 April 2023). Small to Medium Enterprises (SMEs) receive an enhanced deduction that can be cashed out if the company makes a loss. This benefit can range from 24.7% to 33.35% of the qualifying expenditure identified (between 18.6% to 27% from 1 April 2023).

Depending on the company’s size and taxable profit position, R&D tax credits can be paid as:

• A corporation tax refund
• A cash credit
• An enhanced deduction to carry forward against future profits

R&D tax relief is claimed within the company tax return. In order to claim these costs, the business must prove the eligibility of the associated activities. We assist in the preparation of a report detailing how the eligibility criteria have been met, including:

• Advancements sought
• Uncertainties faced
• How these uncertainties were overcome
• Why the knowledge was not readily deducible by competent professionals

This report will be submitted to HMRC alongside your CT return, in addition to HMRC’s additional information form for claims made after 1 August 2023.

Because R&D tax relief is claimed through a company tax return, companies have two years after the end of their financial year to submit an R&D claim. A company year-end 31 December 2022, for example, would have until 31 December 2024 to make an amendment to claim R&D relief.

An SME can generally claim for 65% of the payments made to unconnected parties. Special rules apply to scenarios where the parties are connected.

Subcontracted R&D expenditure is generally not allowable for large companies under the RDEC scheme.

Determining whether costs relate to subcontracting of R&D or the provision of workers can be a complex area and can be depended on the working relationship with 3^rd parties and contractual terms. It is worth speaking to one of our R&D Incentives Advisory team members regarding eligibility of third-party costs for RDEC claims.

There is no specific geographical restriction on R&D tax credits; the location of the activities does not affect eligibility as of the present date. However, the government is considering restrictions to overseas costs for companies whose accounting periods begin on or after 1 April 2024.

These restrictions could mean that R&D incentives can only be claimed for activities carried out in the UK, or where workers are paid through a UK payroll, unless there are material factors such as environment or regulatory requirements that mean those activities must take place overseas. Until these restrictions are implemented, there is currently potential to include expenditure on overseas activities carried out by staff of the UK entity or third-party workers provided those costs are recognised in the UK entity’s accounts.