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Research & Development (R&D) Accounting

Welcome to QA Accounting for Research and Development!

For those clients who qualify by virtue of performing activities that meet the definition of research and development activities, there are opportunities to take advantage of some very significant tax reliefs!

R&D Consultancy is not a service we currently provide in-house, but we are happy to submit Corporation Tax Returns inclusive of associated R&D tax credits in support those clients who wish to submit their own claims, or use the services of an external consultancy provider for these purposes.

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Different Types of Claim

 

The type of R&D claim which must be submitted depends on the size of your company and whether the project has been sub-contracted to you:

SME R&D Tax Relief

Who Can Claim?

You can claim SME R&D Tax Relief providing the following BOTH apply:

  • Less than 500 staff
  • GBP equivalents of: Turnover under 100 million euros, or Net Assets under 86 million euros

Note – Where your company has external investors, then the equivalent (percentage controlled) values of linked or partner entities also need to be included in these totals.

Linked enterprises – Your company is linked to another one if either party holds greater than or equal to 50% of the voting capital, or another party holds greater than or equal to 50% of the voting capital in both.

 

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Partner enterprises – Your company is linked to another one if either party holds greater than or equal to 25% of the voting capital

Note – Only include the “percentage controlled” values.  E.g. So if you own 60% of another company, only use 60% of the Turnover, and 60% of the Net Asset values added to the full values of your own company when determining eligibility.

Where you have already received some other form of state aid, for instance in the form of grant funding, then you are NOT eligible for SME R&D Tax Relief.

Relief is not available where the work has been sub-contracted to you or where the work has been part funded by other forms of state aid, such as grant funding.

What Tax Relief is Available?

Tax Relief available includes:

186% of qualifying costs are tax deductible

Where there is a loss, 10% of the value of the loss can be repaid

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R&D Expenditure Credit (RDEC)

Large companies (those who exceed the limits outlined for SME R&D Tax Relief), or where you are not eligible for SME R&D Tax Relief, can claim R&D Expenditure Credit (RDEC) tax relief.

What Tax Relief is Available?

Tax Relief available includes:

  • From 1st April 2023 20% of qualifying costs are available as “expenditure credits” to either pay outstanding taxes, or as repayments of taxes previously paid.
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Which Costs Qualify

With the exception of ‘Contributions for Independent R&D’ which can only be claimed by Large Companies, the following costs are eligible for relief irrespective of the type of claim:

  • Consumable items – The proportion used by the project can be claimed (e.g. fuel, materials, power, water, etc).
  • Clinical trials volunteers – Where payments have been made to the subjects of clinical trials.
  • Data licence, software, and cloud computing costs – Including: data storage, hardware facilities, operating systems, software platforms, etc.
  • Externally provided worker costs – Only available at 65% of agency worker costs, unless the agency is a “linked / partner enterprise” (per above).
  • Staff costs – Available at 100% of wages, pension, taxes, based on the proportion of time they spend on the project.
  • Recruitment costs – Where the staff specifically work on the project.

Does Work Qualify as Research and Development?

 

The first stage of the process is to determine whether work that is performed by your company qualifies as research and development expenditure.  In order to qualify for R&D the work must be:

  • Part of a clearly definable project
  • Which has the aim of making an “advance in science or technology”
  • And which relates to your company’s existing trade, or a trade you intend to pursue if the R&D is successful

Ensuring that the claim relates to “science and technology” is important because for the purposes of claiming R&D tax reliefs advances in other fields such as: the arts, humanities, social sciences, economics, etc, DO NOT qualify.

In order to justify that the project you have performed will provide an advance in science and technology you will also have to explain how it achieves the following goals:

  • Looked for an advance in the “field” – You must demonstrate that the project created a genuine advance in the field of science and technology itself as opposed to your business in isolation. Existing advances made by others which are not yet publicly known or available can be ignored when making this determination.
  • Had to overcome the scientific or technological “uncertainty” – You must demonstrate that the outcome is uncertain to the extent that other experts would not be able to advise how to do it in advance of the work being performed.
  • “Tried to overcome” the scientific or technological uncertainty – You must demonstrate the steps your company took to overcome this uncertainty, such as outlining the research, analysis, and testing performed.
  • Could not be easily worked out by a professional in the field – You must demonstrate that equivalent work would have also been required by another professional to resolve the uncertainty.
  • Your project may relate to a new process, product, or service, or improve on an existing one.

 

Process for Making a Claim

From 1st April 2023, you now need to notify HMRC that you plan to make a claim.  This process can be performed online and needs to be done within 6 months of the end of the accounting period in which you incurred R&D project expenditure, unless you have previously submitted an R&D claim in the previous three years.

Additionally, from 8 August 2023 you must also submit an additional information form summarising the full details of the claim prior to the submission of the Corporation Tax Return.  For clarity, HMRC have provided full details of the scope of information that must be included in this report.

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