Indie Dev’ Guide 8: R&D Tax Relief Claims for SMEs

Introduction

For Small and Medium Enterprises in the UK, Research and Development (R&D) tax relief enables companies that incur costs in developing new products, processes or services to obtain additional deductions against their taxable profits. 

This scheme is designed to encourage innovation and increase spending on R&D activities by UK companies.

Eligibility

In order to determine whether the company will qualify for an R&D claim, your answers to the following questions, must fall within the definition of qualifying R&D:

• What is the project?
• What is the scientific or technological advance?
• What were the scientific or technological uncertainties involved in the project?
• How and when were the uncertainties overcome?
• Why was the knowledge being sought not readily deducible by a competent professional?
• Cost of R&D to company?

It is recommend that you take specialist advice to confirm whether work you undertake qualifies for R&D relief.

Rates of relief

Over the last few years, the rates of relief for R&D have changed, mainly increasing the value of the relief for companies that qualify.

From April 2023, the tax relief on allowable R&D costs was reduced to 186%. This means that for every £100 of qualifying costs, your company could reduce your taxable profits by a further £86 on top of the £100 you actually spent.

If your company has an allowable trading loss, this can be increased by 86% of the qualifying R&D costs – so that’s £86 for each £100 spent.

This loss can be carried forward and offset against future profits of the same trade, potentially saving corporation tax at 25%, based on the current main corporation tax rate. It could also be carried back and offset against the previous year’s corporation tax liability, if there was one.

Alternatively, you can choose to convert the losses into a repayable tax credit, which from April 2023 is at a rate of 10%. This may be preferred as it offers an instant cash injection, whereas although carrying losses forward could obtain greater tax relief (at 25%), there is no guarantee the company will be profitable in the short term, and the cash may be more important. However, in order to deter abuse of this scheme HMRC announced a restriction from April 2021 to the amount of tax credit a company can receive in one year. The cap is set at £20,000 plus three times the company’s total PAYE and NIC liability for the year.

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