Eligible companies can benefit in one of two ways:

• A reduction in their corporation tax liability, or
• A payable cash credit if the company is loss-making.

The benefit of making an R&D tax credit claim can be significant to the cashflow of a business, particularly in conjunction with patent box claims.

Conditions

Research and Development (R&D) relief is available to businesses in a wide range of industries, including (but not limited to) manufacturing, construction, software development, engineering, and food production.

To be eligible, your project must:

• Seek an advance in science or technology;
• Involve uncertainty that could not be easily resolved by a competent professional in your field;

Making a Claim: Timing and deadlines

Timing is critical when it comes to making an R&D claim and failure to get it right can result in valuable tax relief being missed.

Claims must be submitted within two years of the end of the relevant accounting period. For example, if your financial year ended on 31 March 2024, you have until 31 March 2026 to make a claim.

From 1 April 2023, new rules introduced a requirement for companies to submit a claim notification to HMRC within six months of the end of the accounting period if they have not made an R&D claim in any of the previous three years. For a company with a 31 March 2024 year end, this would require a notification to be made by 30 September 2024.

Failing to notify HMRC within this time period could invalidate your claim, even if your project would otherwise qualify. It’s therefore important to seek advice early and plan your claims in line with your year-end.

How HMRC Assesses R&D Eligibility

Because R&D claims are assessed by HMRC, it’s essential to understand how they interpret the guidelines. When reviewing claims, HMRC typically asks:

1. What is the current state of knowledge or capability in your field?
2. What scientific or technological advances is the company trying to improve or achieve?
3. What specific uncertainties does the business intend to resolve?
4. How does the business plan to resolve the above uncertainties? i.e., the process and methods of developing/producing new knowledge.
5. What is the commercial or technical goal of the project?
6. Will your success contribute to overall improvement in your sector e.g., more efficient, cost-effective, or sustainable outcomes?

Critically, it is important to know that even if a project fails, it may still qualify for relief as long as you are able to demonstrate that it involved qualifying R&D activity.

What Costs Can Be Claimed as R&D Expenditure?

Expenditure incurred must be ‘qualifying expenditure’ for the purposes of the relief. For revenue expenditure to qualify, it must have been incurred on the following:

• Staff costs, including salaries. Employers’ NICs, pensions and certain expenses for employees directly involved in the R&D
• Sub-contracted R&D costs i.e. payments made to subcontractors
• Externally provided workers, which include agency workers or freelancers contributing to the project
• Software, as long as it is used directly in R&D activities
• Consumables and materials such as electricity, water or components/materials used up in the process. Notably, this does not include rent
• Payments to subjects of clinical trials

For capital expenditure, research and development allowances (RDAs) may be available, but the relief is less beneficial than for revenue expenditure.

The Merged Scheme

For accounting periods beginning on or after 1 April 2024, a new ‘merged’ R&D scheme will come into effect. This unified scheme combines elements of the previous SME and RDEC schemes and aims to simplify the systems and create a more streamlined approach to R&D relief.

The RDEC is treated as a taxable receipt in computing the trading profits and a tax credit of 20% of the qualifying R&D expenditure is then taken.

If there is an insufficient corporation tax liability to fully deduct the RDEC, the company may receive a cash repayment from HMRC.

R&D Intensive SMEs

Special provisions remain for R&D-intensive small and medium-sized enterprises (SMEs) that are loss-making and heavily focused on innovation.

These rules apply for accounting periods beginning on or after 1 April 2024, and in order to qualify the company must:

• be loss-making, and
• R&D expenditure must account for at least 30% of total company expenditure.

The way in which relief is given under the R&D intensive SME scheme is different than under the merged scheme.

A company which meets conditions can claim an additional deduction equal to 86% of its qualifying R&D expenditure. Therefore, an R&D intensive SME can claim a total of 186% of its qualifying R&D expenditure as a deduction.

R&D intensive SMEs can also surrender part of the ‘surrenderable’ loss for the period to the government in return for a tax refund.

The surrenderable loss is the lower of:

• The unrelieved trading loss; and
• 186% of the qualifying R&D expenditure.

The credit is then given as the lower of:

• 14.5% of the surrenderable loss; and
• The cap relating to PAYE and NICs liabilities.

All payable SME tax credits are subject to a cap of £20,000 + 30% of the claimant’s total PAYE/NIC liabilities.

Why Stratos?

Navigating R&D tax relief is complex, and timing is very important, but we can make it as easy as possible for you. Our experienced tax advisors:

• Identify qualifying projects and expenditure
• Prepare and review technical narratives and report to demonstrate that the conditions are met HMRC’s requirements;
• Ensure compliance with the latest legislation and industry-specific guidance;
• Liaise with HMRC on your behalf in case of enquiries or audits;
• Provide peace of mind that your claim is accurate, defensible, and optimised.

Whether this is your first R&D claim or you’re looking to improve on previous submissions, we tailor our approach to your needs — helping you access funding you may not even realise you’re entitled to.