14 February 2022
Tax reliefs are a key feature of the UK tax system and the tax reliefs for Research&Development (“R&D”) are an example of reliefs that are designed to support government policy by encouraging businesses to change their behavior. In the UK companies are able to claim tax relief for their R&D activity.These government schemes are designed to boost innovation by supporting businesses who seek to improve or overcome challenges and uncertainties in their products and processes.
R&D Tax Relief: Qualifying and Expenditure
R&D relief can be relieved in the following ways:
for a trading company, revenue expenses are allowable as a deduction against the profits of the trade, and capital expenditure may be eligible for a 100% R&D allowance as detailed in R&D allowances in the Business premises renovation allowances guidance note (CTA 2009, s 87).
in addition, for companies only, qualifying expenditure on R&D is eligible for additional R&D tax relief, the type of relief will depend on whether the Company is a small or medium sized enterprise (SME) or a large company
There is a requirement for both the SME and large company that the R&D must be relevant R&D for the claimant company which means that it is related to a trade carried on by the Company or the trade of the Company will be derived from the R&D in the future (CTA 2009, s 1042). Overseas companies can claim R&D tax relief in the UK, but only if they are within the territorial scope of corporation tax. Broadly, a non-resident company is only subject to UK corporation tax if it carries on a trade in the UK through a UK permanent establishment (PE).
The work of the company that qualifies for R&D relief must be part of a specific project to make an advance in science or technology. The project must relate to the company’s trade.
There are four basic criteria which determine the project as eligible for R&D Tax Credits:
Investigate an advance the field This discounts using something that already exists. It means that the Company shall create a service, product or process that is considered innovative within its sector.
Demonstrate uncertainty at the start of your innovation This means that the answer is not already out there with other experts in the Company’s field. Whatever Company is working on is not already a known technological or scientific thing. So Company do not know what the outcome may be.
Explain Company’s working out It needs a record of Company’s innovative project from beginning to end, including explanation of how the Company tried to overcome the previously identified uncertainty. It needs all the research, analysis and testing as evidence.
Show that another professional couldn’t have come to the same conclusion It needs to be able to show that other professionals could not easily figure out the same advance in Company’s field. This can be done by confirming the expertise of the people working on the project and getting them to explain.
Qualifying types of expenditure for R&D tax relief
Not all expenditure which meets the qualifying conditions is available for R&D tax relief, the expenditure must also fall within certain qualifying categories which are detailed below:
consumable or transformable items
relevant payments to the subjects of clinical trials
subcontracted out R&D costs (where the SME subcontracts R&D work to a third party, an SME may claim relief. The treatment varies depending on whether the two parties are connected. But for large companies this is restricted)
cost of R&D work subcontracted to the company (this is restricted for both SMEs and large companies)
externally provided workers
for large company R&D relief only, contributions to independent research
Reform of R&D Tax Relief
At Autumn Budget 2021, the Government announced that R&D tax reliefs would be reformed in three areas:
support modern research methods by expanding qualifying expenditure to include data and cloud costs
more effectively capture the spillover benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK
target abuse and improve compliance
How will data and cloud costs be included in the R&D tax relief schemes?
The following new categories of R&D expenditure will be brought into scope:
1. Licence payments for datasets Included for R&D relief expenditure via licence payments on purchasing datasets which are used directly for R&D in a qualifying R&D project. A licence will not qualify if it grants:
any rights of resale over the data;
any right to publish, share or otherwise communicate the raw data to a third party; or
any ongoing rights of use, beyond the expected term of the R&D project.
Staff costs, where collecting, cleansing and analysing data for a qualifying project have always been eligible.
It is important for the companies to ensure that when preparing contracts the above exclusions are not inadvertently overlooked.
2. Cloud computing costs that can be attributed to computation, data processing, and software Relief will be allowed for the cost of cloud computing services used directly for R&D services, e.g. costs attributed to computation, data processing, analytics and software. Cloud computing packages will often include costs that relate to other categories, such as data storage overheads. These are likely to be excluded, in an equivalent way as other general overheads such as rental costs.
How will R&D tax relief be used to focus on innovation in the UK?
The Government proposes to limit relief for payments to subcontractors, in both schemes, to claims where the subcontracted activities take place in the UK.
Similarly, where companies claim for expenditure on Externally Provided Workers (EPWs), these will in future be restricted to EPWs who are within UK PAYE/ NIC (National Insurance Contributions).
How will HMRC (HM Revenue & Customs) target its compliance work?
To protect the integrity of the R&D tax reliefs the Government has proposed an administrative change that means in the future, companies will need to provide more information when making claims, that claims should all be made digitally and that the intention to claim must be notified in advance.
HMRC have already allocated additional resources to compliance, creating a new team focussed on abuse of the R&D reliefs.
Companies that spend money developing new products, processes or services; or enhancing existing ones, are eligible for R&D tax relief. If your company is taking a risk by innovating, improving, or developing a process, product, or service, then it is likely that you will qualify for R&D tax credits.
If you have any questions regarding the R&D Relief and examine how it works for your business, at LEXeFISCAL we are always ready to assist you.
For further information on any of the points above, please contact:
Kseniya Devlekanova at email@example.com, or
Dr Frank J Clifford at firstname.lastname@example.org
LEXeFISCAL LLP, Landsdowne House, 57 Berkeley Square, London, W1J 6ER