R&D Tax Credits
Knowledge Hub
The Essentials of the HMRC Initiative
All About Revenue’s Innovation Relief
Signing to Submission
Sectors - Who can claim
As long as an innovation seeks to resolve a scientific or technological uncertainty (a gap in the knowledge or capability) that a qualified professional couldn’t easily figure out or resolve using existing principles or solutions, that innovation could potentially qualify for the incentive.
However, the most frequently claiming sectors are software, engineering, manufacturing and life sciences.
Project - Qualifying Criteria
A qualifying innovation project must attempt to fill a gap in the market by creating a new or enhancing an existing product, service or process.
In doing so, the R&D project should include the following:
The innovation project may be successful or not. As long as an attempt was made, the R&D project could qualify.
Activity - Qualifying stages of an innovation
There are non-qualifying and qualifying stages of an innovations’ life cycle.
Non-qualifying
Qualifying R&D
Non-qualifying
Costs - Qualifying project costs
The following 5 costs qualify if they were directly used or consumed in the R&D project:
1. People
Salaries, wages, NICs & pension contributions of employees and externally paid workers.
2. Subcontractors
Up to 65% of unconnected subcontractor, agency staff or freelancer costs on the SME scheme (more restrictions on the RDEC scheme and from accounting periods beginning on or after the 1st April 2024 there are restrictions on overseas contractors – see R&D tax credits explained).
3. Raw Material
Materials and hardware e.g. chemicals, ingredients, electronic components.
4. Utilities
Power, water and fuel.
5. Software
Software expenditure (Data & Cloud Computing Costs (including data storage, hardware facilities, operating systems, software platforms and the purchase costs of data sets) will also be included on or after financial years beginning on or after 1st April 2023).
When to claim
R&D tax credits can be claimed for the last two closed financial years.
Grants - How they effect an R&D tax credit claim
It is possible to claim both grants and R&D tax credits, and our Grants Vs Tax Credits article highlights the recent changes in their relationship. However, there are numerous factors that determine what you can and cannot claim, so it’s best to consult an expert who can assess your specific innovation and its unique circumstances.
Breakdown of the scheme rates, start and end dates
The below expenditure relates to qualifying R&D tax credit project costs.
Expenditure made on or before 31st March 2023
Expenditure made on or after 1st April 2023
Accounting Periods Commencing 1 April 2024
SME and the RDEC scheme details
SME Scheme
The SME scheme is for qualifying R&D activity in small and medium-sized businesses.
For expenditure made on or before 31st March 2023, it offers an additional tax deduction of up to 130%. For expenditure made from 1st April 2023, it offers an additional tax deduction of up to 86%.
RDEC Scheme
The RDEC scheme is for qualifying R&D activity in large enterprises
For expenditure made on or before 31st March 2023, it offers an additional tax credit gross benefit of 13%. For expenditure made from 1st April 2023, it offers an additional tax credit gross benefit of 20%.
Migration To The Merged Scheme
Both these schemes are being superseded by the merged scheme. The new merged scheme applies to expenditure incurred in accounting periods commencing 1st April 2024. It is important to note that this is not for expenditure incurred from the start of April. For example, if the company year-end is 31st December 2024, all qualifying R&D costs from 1st January 2024 to 31st December 2024 are included in the SME/RDEC scheme and it won’t be until the following financial year (31st December 2025 year-end) that the company’s R&D spend will changeover into the new merged scheme.
Merged scheme details
As part of a series of reforms, the new merged scheme applies to most SMEs (although some may qualify for the Enhanced R&D Intensive Support (ERIS)) and all large enterprises. It will apply to any qualifying R&D expenditure incurred in accounting periods commencing on or after 1st April 2024.
This single scheme replaces the previous SME and RDEC schemes and provides an additional tax credit gross benefit of 20%.
Introduced With This Reform:
The Merged Scheme Migration
The merged scheme applies to expenditure incurred in accounting periods commencing 1st April 2024. It is important to note that this is not for expenditure incurred from the start of April. For example, if the company year-end is 31st December 2024, all qualifying R&D costs from 1st January 2024 to 31st December 2024 are included in the SME/RDEC scheme and it won’t be until the following financial year (31st December 2025 year-end) that the company’s R&D spend will change over into the new merged scheme.
Enhanced R&D Intensive Rate (ERIS)
The Enhanced R&D Intensive Rate (ERIS) is an enhanced payable credit rate of 14.5% is available for eligible R&D intensive loss-making SMEs that fall into the below criteria:
Pre-Claim Notification
R&D tax credit claims for expenditure during accounting periods beginning on or after 1st April 2023 must now notify the HMRC in advance of their intention to submit a claim.
Who Does It Affect?
Requirements of the Pre-Claim Notification
The claim notification form can be completed by either a company representative or an agent acting on the company’s behalf and will require:
Timeline to Submit The Pre-Claim Notification
The advance notification must be submitted within 6 months of the end of the accounting period for which the claim is being made.
Additional Information Form (AIF)
The R&D tax credit additional information form is a required document that businesses must submit to HMRC to support their claims for Research and Development (R&D) tax relief or expenditure credit. This form provides detailed information about the R&D activities, associated costs, and supporting evidence for each accounting period
Mandatory Submission
Introduced as a mandatory process for claims made on or after 8th August 2023, the Additional Information Form (AIF) must be submitted for each accounting period before or on the same day as your Company Tax Return. Without it, your claim will be invalid.
What Details Are Required
Who Can Submit An AIF
The AIF can be completed and submitted by either the claimant or an agent acting on behalf of the company.
Financials - What is required
To perform an in-depth analysis of a project’s relevant R&D expenditure (i.e. staff & EPW, subcontractors, consumables, utilities, software, data & cloud computing costs) and to create an R&D tax credit report that has a full and defendable audit trail, our R&D specialists will analyse the following financial documentation.
Technical Narrative - What we include
To tackle abuse and fraudulent R&D tax credit claims, the government has introduced a new cross-cutting team and is requiring more detailed claims.
Therefore, the technical narrative needs to fully justify the expenditure outlined in the financial report.
Our industry experienced technical writers will interview the competent professional and other key members of the R&D team and produce a comprehensive technical narrative, which will include key information such as:
Accountant - Their role
In our process, the accountant is only required to:
How to claim
We recommend working with a specialist R&D tax credit provider (like Amplifi Solutions) to complete an R&D tax credit claim.
We have an experienced team of qualified accounts, chartered tax advisors, client account managers and industry experienced technical assessors who will compile a comprehensive claim, which we will defend against any HMRC enquiry.
Benefit - When the benefit should be received
Offsets will be taken off the tax bill when it is due.
Cash payments are estimated at 40 – 60 days, but this does depend on the HMRC workload.
Enquiry - Why HMRC would open a claim enquiry
The R&D tax credit incentive is currently undergoing a number of reforms, one of which is improving compliance and tackling abuse (£469 Million was lost in 2020/21 alone to fraudulent claims and error).
Subsequently, a number of new measures have been introduced, including adding 100 more compliance team members and requesting more details in claims, but it has also resulted in a rise in enquiries.
Some of the main reasons a R&D tax credit claim may undergo an enquiry include:
To help project your claim, work with an R&D tax credit advisor, like Amplifi Solutions.
We perform in-depth financial analysis of your R&D expenditure, create educated technical narratives that justify your spend, and we will defend our reports against any HMRC audit.
Aircraft design, surface treatments, adhesive bonding, manufacturing tools, methods etc.
Developing water, waste and energy infrastructures or innovating new HVAC systems, BIM, LID techniques, etc.
Creating electrical, security, power, telecommunications, fire protection, water and waste systems, HVAC, etc.
New drugs, species, formulas, medical devices, etc. FDA-compliant trials, screening, preclinical testing etc.
Updating products, finishes, performance features, etc. New waste reduction processes, technology infrastructures etc.
Innovative refrigeration, plumbing, heating, waste and HVAC system designs. CAD modelling, CFD analysis etc.
Development of generators, wastewater treatment, offshore electrical infrastructures, drilling equipment etc.
New software solutions, data encryptions, algorithms, adaption of off-the-shelf solutions, IoT and smart devices etc.
Bespoke waste management methods, machinery, technology, purification processes, safety processes etc.
Investors’ Portfolio Benefits
Investors seeking to increase their portfolio valuations and creasing their cash runways? This video explains how Amplifi Solutions expert service can help.
Land Remediation Relief
Investment in bringing contaminated or derelict land back into a productive state could receive a tax credit between 8p – 28.5p for every qualifying pound spent.