The Government continues to support UK businesses’ post-COVID recovery through Research and Development (R&D) tax credits, but are you aware of the change that came into force from April 2021?
Introduced in the Finance Bill 2021 were changes to the criteria which were designed to prevent fraudulent tax credit claims. The previous system was open to abuse by false claims that actually fit no clear R&D eligibility.
A PAYE cap to limit the amount of R&D tax credit for small and medium sized companies began in April 2021. The cap puts a limit of £20,000 plus 3x the company’s total PAYE and NICs payable for the year. There is no change for small businesses that claim less than £20,000.
The vast majority of companies that already claim the tax credit will be unaffected but there will be some losers – genuine companies with UK R&D activity that have low PAYE and NICs liability relative to their R&D spend. These companies will still be able to claim payable credit up to the cap with any unused losses carried forward to be set against future profits.
Who can claim R&D tax credits?
Contrary to popular belief, R&D tax credits are not just for the technology sector. If your company incurs costs in overcoming technical uncertainties, then you may have a valuable claim to make. Innovation in research and development happens in all business sectors from automotive and aviation, through manufacturing, electronics, food, energy and insurance.
What activities does ‘Research & Development’ cover?
HMRC has a wide-ranging set of criteria for R&D requirements. No matter the size of the business or the sector it operates within, if you are embarking on a project that may not be scientifically or technologically possible, or you don’t know how to achieve it in practice, then your activity may qualify.
The project need not be successful to meet the criteria and can also include work you’ve carried out for a client. These types of expenditure count as R&D:
- Staff (including salaries, employer’s NIC and pension contributions)
- Subcontractors and freelancers
- Materials and consumables
- Some software types
How do I make a successful claim?
A strong claim will be clear on eligibility, R&D activity and expenditure, have a comprehensive calculation and supporting analysis, so it’s a good idea to enlist the help of an expert with a clear understanding of the scheme, like Alan Sowden, Technical Director at CRM Oxford.
R&D activity – the description of your R&D activities must comply with guidelines on project description, aims and activity for tax purposes.
Qualifying expenditure – the correct classification of capital and revenue expenditure according to the appropriate legislation and ensuring that non-qualifying cost categories aren’t included is vital.
Company eligibility – ensure that you have followed the correct criteria for being an SME and that you have used the correct treatment of R&D expenditure around grant funding.
Claim calculation – a correct calculation should include the right disclosures and not duplicate expenditure claimed via other reliefs. The supporting analysis and records must be detailed and accurate.
A robust claim takes time and meticulous preparation if it is to be successful and for your company to avoid incurring fines for inaccurate information. We have helped many of our clients to claim back money that they didn’t realise was available to them. Our specialist R&D team will ensure that your claim is accurate and will stand up to HMRC scrutiny. Call us on 01865 379272 for more information.
