Do I qualify for R&D tax credit? A self-check

Do I qualify for R&D tax credit? A quick self-check

A company may qualify for R&D tax relief if it is chargeable to UK Corporation Tax and its project seeks an advance in a field of science or technology by resolving scientific or technological uncertainty. ^[1]

Four questions sit behind that sentence. Is the business a company chargeable to UK Corporation Tax? Is the work in science or technology, rather than the arts or economics? Could an expert on the subject say whether the advance is technologically possible, or how it can be done, even after referring to all the available evidence? Can the people who did the work explain what they tried?

What is R&D in simple terms?

R&D for tax purposes is work aimed at an advance in the overall field of science or technology, not just for the business doing it. Science is the systematic study of the nature and behaviour of the physical and material universe, and technology is the practical application of scientific principles or knowledge. From 1 April 2023, mathematical advances can be treated as science for these purposes, whether or not they are advances in representing the nature and behaviour of the physical and material universe.

An advance may have physical consequences or may be an increase in overall knowledge, and in either case a competent professional working in that field would recognise it as an appreciable improvement. Appreciable improvement means changing or adapting the scientific or technological characteristics of something to the point where it is better than the original.

Projects that could fit include a manufacturer reworking a production line to save costs or reduce waste, a materials business creating a new material that increases capability in its field, or a team using technology to copy the effect of an existing process in a new or improved way. An improvement to something that already exists has to be a genuine non-trivial improvement that results in more than a minor or routine upgrade.

Work that sits outside science and technology

There is no claim where the advance sought is in the arts, the humanities or the social sciences, including economics. A new visual style for packaging, a piece of historical research and a study of how customers react to price changes are examples of advances sought in the arts, humanities and economics, so they fall outside the relief.

The second trap is an advance that is new only to the company. A production system that is new to the company but already publicly available elsewhere is an advance for that business, not for the overall field. The process, product or service can still be an advance if another company has developed it but it is not publicly known or available.

Testing a project for technical uncertainty

A scientific or technological uncertainty exists when an expert on the subject cannot say if something is technologically possible, or how it can be done, even after referring to all the available evidence. In a waste-reduction project, that might be whether a line can run faster without losing accuracy, where specialists cannot say how it could be done even with all the available evidence. The company or experts in the field cannot already know about the advance or the way to solve it.

A company needs to be able to explain the work it did to overcome the uncertainty, and this can be a simple description of the successes and failures during the project. Showing that other attempts to find a solution had failed is one way to explain why a professional could not easily work out the advance. Showing that the people on the project are professionals in that field, and having them explain the uncertainties involved, is another.

HMRC's online tool gives its view on whether a project involves R&D for tax purposes based on the information entered, and a competent professional is needed to answer some of its questions. ^[2]

How does the new R&D tax credit work?

The merged scheme and enhanced R&D intensive support (ERIS) replace the old RDEC and SME schemes for accounting periods beginning on or after 1 April 2024. ^[3] The qualifying expenditure rules for the two new schemes are identical, but the credit amount is calculated differently. A company eligible for ERIS can choose to claim under the merged scheme instead, but it cannot claim under both schemes for the same expenditure.

The guide to how R&D tax credits are calculated covers the intensity test, the calculation and the cost categories.

The merged scheme can be claimed by companies that are trading, are chargeable to Corporation Tax and have a project that meets the definition of R&D. Enhanced R&D intensive support is only available to loss-making R&D intensive SMEs, and a SME is loss-making if it makes a trading loss for tax purposes before the additional deduction is made. Profit-making and non-R&D intensive SMEs with qualifying R&D expenditure can claim under the merged scheme instead.

Which R&D scheme applies to your accounting period?

There are 4 different types of R&D tax relief, and which one a company uses depends on when its accounting period began. ^[4] For accounting periods beginning before 1 April 2024 the schemes are RDEC and SME tax relief, and for accounting periods beginning on or after 1 April 2024 they are the merged scheme and ERIS.

Within a project, the qualifying question comes before the costs: once a company has checked what R&D is and that the project qualifies, the next check is which R&D costs can be claimed. A project that qualifies as R&D for tax purposes does not always mean relief can be claimed on all R&D related costs.

The guide to claiming R&D tax credits for earlier years covers notification and timing.

Is there an R&D refundable tax offset in the UK?

The closest features in the supplied guidance are the expenditure credit under the merged scheme and the payable tax credit under enhanced R&D intensive support. The closest UK features are the expenditure credit under the merged scheme and the payable tax credit available under enhanced R&D intensive support.

Neither changes the tests set out above: the company still needs to be chargeable to UK Corporation Tax, with a project seeking an advance in science or technology by resolving scientific or technological uncertainty. The RDEC scheme explained page and the guide to how R&D tax credits are calculated describe how each credit is worked out and paid.