The R&D payable tax credit restriction affects how much qualifying companies can claim in tax relief. This is especially relevant for small and medium-sized enterprises (SMEs) that conduct research and development activities in the UK. First-time claimants or those who have not made a claim in over three years must submit a claim notification form within six months after the end of the accounting period to ensure compliance with HMRC procedures.
Eligibility for Tax Credit Claim
To qualify for R&D tax relief, your company must be working on projects that seek to advance science or technology. Only businesses subject to UK Corporation Tax can make claims. For SMEs, specific R&D tax relief is available for accounting periods starting before 1 April 2024, providing significant corporation tax relief by generating enhanced deductions and potential losses that can be surrendered for cash credits.
The restriction that came into effect from 1 April 2020 limits the amount of payable R&D tax credit that loss-making companies can receive. This cap is set at £20,000 plus 300% of your company’s total PAYE and National Insurance contributions for the period.
This means if your business conducts qualifying R&D activities but has limited payroll costs, your maximum tax credit claim could be significantly affected.
Benefits for SMEs and Larger Companies
Despite the restrictions, R&D tax relief remains highly beneficial for innovative companies. For SMEs, the scheme can provide substantial financial support for your research activities.
Loss-making SMEs can:
- Convert R&D expenditure into payable tax credits (subject to the restriction)
- Receive up to 33p for every £1 spent on qualifying R&D activities
- Carry forward losses to future accounting periods
For accounting periods beginning on or after 1 April 2021, your SME R&D repayable tax credit is limited to three times your PAYE and National Insurance contributions. This ensures the relief targets companies with genuine UK presence while still providing meaningful support for your innovation activities.
The scheme aims to balance generous tax advantages with safeguards against exploitation. The Large Company Scheme, introduced in 2002 and discontinued in 2016, previously provided tax incentives for large companies before being replaced by the R&D Expenditure Credit (RDEC) scheme, which offers more flexible benefits for loss-making companies.
Calculating Qualifying Expenditure
Determining your qualifying expenditure for R&D tax relief requires careful identification of eligible projects and qualifying costs. The calculation process involves several specific categories of expenditure that HMRC recognises as valid for tax relief purposes.
Identifying Qualifying Projects
To calculate qualifying expenditure, you must first identify which of your projects meet HMRC’s R&D criteria. Qualifying projects must seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainties.
Your project qualifies if it:
- Attempts to create new products, processes or services
- Tries to change or improve existing ones
- Works to overcome technological problems
- Contains genuine technical uncertainties where solutions aren’t readily deducible
Document your project’s technical challenges and how they were addressed. This evidence forms the foundation of your R&D claim and helps justify the expenditure you’re claiming. Focus on activities that directly contribute to resolving these uncertainties rather than routine development work.
Expenditure on Staff and EPWs
Staff costs often form the largest part of R&D qualifying expenditure. You can claim for:
- Direct staff costs: Salaries, employer’s NIC, national insurance contributions liabilities, pension contributions for staff directly engaged in R&D
- Externally Provided Workers (EPWs): Temporary or contract staff working under your supervision
- Subcontractor costs: Payments to subcontractors performing R&D activities on your behalf
For SMEs, you can typically claim 65% of payments to subcontractors. EPW costs are calculated at 65% of the payments made to the staff provider.
Time allocation is crucial when staff split their time between R&D and non-R&D activities. Keep detailed timesheets or make reasonable estimates based on project involvement. Only the proportion of time spent on qualifying R&D activities can be included in your calculation.
Capital Allowance and Pure Mathematics
While direct R&D expenditure excludes capital purchases, you can claim capital allowances on assets used for R&D activities. These include:
- Equipment and machinery used for R&D purposes
- Computer hardware and facilities dedicated to R&D
- Laboratory equipment and testing apparatus
Additionally, companies can claim relief on capital expenditures used for R&D activities by following the necessary steps and meeting eligibility criteria.
From accounting periods starting on or after 1 April 2023, expenditure on pure mathematics R&D now qualifies for relief. This includes:
- Mathematical algorithms
- Theoretical statistical models
- Data analytics techniques
- Complex computational methods
For capital assets used partly for R&D, claim only the appropriate percentage of use. Document the basis for your apportionment to satisfy HMRC requirements during potential enquiries.
Additional Eligible Costs
Several other cost categories qualify for R&D tax credit relief:
Consumables and materials:
- Raw materials used in tests
- Utilities directly related to R&D processes
- Items transformed or consumed during R&D
Software costs:
- Software licence fees for R&D tools
- Cloud computing costs related to R&D activities
- Data processing services for experimental analysis
Other qualifying expenditure:
- Payments to volunteers in clinical trials
- Contributions to independent research
From April 2023, data licence costs and cloud computing services qualify for relief when directly used for R&D. Keep detailed records connecting these costs to your qualifying R&D projects, including invoices, contracts, and usage patterns.
Applying the Restriction and Rates of Relief
The R&D tax relief scheme applies different rates and restrictions based on company size and profitability. Understanding these elements is crucial for maximising your claim while remaining compliant with HMRC requirements.
Understanding the Restriction
The R&D payable tax credit restriction limits how much tax credit you can receive in cash if your company is loss-making. For SMEs, this restriction caps the payable credit to three times your total PAYE and NIC liability for the period. This means if your company has little or no staff costs, your ability to receive cash payments may be limited.
Companies with significant R&D but low PAYE/NIC contributions should carefully plan their claims for tax purposes. You might consider timing your R&D activities to align with periods of higher payroll taxes.
The restriction aims to prevent abuse of the system and focuses benefits on businesses with genuine UK presence and employment.
Rates of Relief for Different Company Sizes
The rates of relief for R&D tax credits vary significantly depending on your company’s size and the scheme you qualify for:
SME Scheme (for qualifying small and medium enterprises):
- Up to 27% of qualifying R&D expenditure for loss-making companies
- Approximately 24.7% effective benefit for profit-making companies paying the 25% corporation tax rate
RDEC Scheme (Research and Development Expenditure Credit):
- 20% tax credit on qualifying expenditure (increased from 13% after March 2023)
- Net benefit of approximately 15% for companies paying the main 25% corporation tax rate
- Higher net benefit of 16.2% for companies paying the small profits rate of 19%
Your company size classification is determined by staff headcount, turnover and balance sheet totals, not just by revenue alone.
Claiming the Tax Credit
To receive R&D tax relief, you must follow specific HMRC procedures for a tax credits claim. The claim process involves proper documentation and consideration of your company’s financial position, especially regarding trading losses.
Submission to HMRC
You must submit your R&D tax credit claim through your Company Tax Return (CT600) or as an amendment within two years of the end of your accounting period. When filing, include the enhanced expenditure in the designated box on the CT600 form.
For SMEs with accounting periods starting before 1 April 2024, you can claim the relief under the SME scheme. After this date, the merged scheme applies to all companies. Remember that your claim must relate to specific R&D projects that meet HMRC’s definition of advancing science or technology.
The payable tax credit is restricted to £20,000 plus 300% of your company’s PAYE and National Insurance contributions for the period. This cap helps HMRC prevent abuse of the system.
Documentation and Additional Information Form
Your tax relief claims must include an Additional Information Form that details your R&D activities. This form requires:
- Project descriptions showing scientific or technological advancement
- Explanation of uncertainties overcome
- Breakdown of qualifying expenditure (staff costs, subcontractor costs, consumables)
- Calculation of enhanced expenditure
Essential documentation to prepare:
- Technical narrative for each R&D project
- Timesheet records for relevant staff
- Evidence of technical challenges faced
- Financial records linking expenditure to specific projects
Keep all supporting documentation for at least six years, as HMRC may conduct compliance checks.
Adjustment for Trading Losses
When your company has made a trading loss, you have several options for the R&D tax relief and R&D tax credit:
- Surrender losses for a payable tax credit – Subject to the cap of £20,000 plus 300% of your PAYE/NIC liability
- Carry losses back to the previous accounting period to offset against profits
- Carry losses forward to set against future profits
Your claim must certify that the company is a going concern. If you’re uncertain about your company’s financial stability, consult with an accountant before making a claim.
For accounting periods beginning on or after 1 April 2021, the payable tax credit is limited to three times your PAYE and National Insurance contributions. This restriction aims to ensure R&D tax relief benefits companies with substantive UK operations.
Impact on Business Innovation and Intellectual Property
The R&D tax credit restrictions and evolving tax relief schemes can significantly affect how businesses approach innovation and manage their intellectual property. These changes influence both strategic planning for research activities and decisions about protecting valuable IP assets.
Encouraging Innovation through R&D Incentives
R&D tax credits were designed to boost innovation by offsetting some of the financial risks associated with research for UK companies. Despite the recent restrictions, you can still receive substantial support for your innovative activities. The merged scheme starting April 2024 aims to streamline the process, making it more accessible.
However, the £20,000 plus 300% of PAYE and National Insurance contributions cap means you’ll need to plan your research spending more carefully. This could particularly impact small businesses with limited payroll costs.
To maximise your innovation potential under these restrictions:
- Plan your R&D activities to align with your PAYE and NI contribution levels
- Consider phasing research projects strategically across tax years
- Document your innovation processes thoroughly to strengthen claims
Intellectual Property and R&D Credits
The relationship between the R&D tax credits and the tax relief scheme for intellectual property is crucial for maximising the value of your innovation. When you invest in research that leads to patents, trademarks or other IP assets, you can potentially benefit twice – through tax relief and the commercial value of your IP.
The credit restrictions may affect how you approach IP development:
Prioritisation: You might need to focus on IP development that delivers the highest potential commercial returns
Timing: Consider aligning patent applications with your R&D tax credit strategy
IP protection: Despite restrictions, the cash benefit from R&D relief can help fund protection of your intellectual property
Remember that the advancement in science or technology required for R&D relief often aligns perfectly with developments worthy of IP protection. By planning carefully, you can navigate the restrictions while still developing valuable intellectual property.
Worried about how the R&D changes affect you? We’ll help you understand the new restrictions and what they mean for your claim. Get clear, practical advice from Plus Accounting.