R&D Tax Relief Explained
Understanding R&D tax in an ever changing environment
Why R&D tax relief exists
The UK Government introduced R&D tax relief to encourage investment in innovation, recognising the cost and risk involved in developing new or improved products and processes.
However, the way this is interpreted in practice requires careful consideration of both the work undertaken and the legislative framework.
How eligibility is assessed
Eligibility is not determined by company size or sector alone.
It depends on whether the work undertaken meets the legislative definition of R&D. Specifically, whether it involves resolving scientific or technological uncertainty.
How claims are calculated
The value of an R&D claim depends on the qualifying expenditure and the applicable scheme.
However, the key consideration is not the amount claimed, but whether the underlying work and costs are accurately identified and properly supported.
Understanding the current R&D tax framework
The UK R&D tax landscape has undergone significant change, with the introduction of new schemes and revised rules.
While the structure appears simpler on the surface, the practical application has become more complex.
Merged Scheme
The Merged Scheme replaced the old SME and RDEC regimes for most claimants.
Key features include:
- A single 20% taxable credit, giving an effective net benefit of up to 16.2% of qualifying R&D spend, depending on your Corporation Tax rate.
- Updated, unified rules for contracted-out and subsidised R&D.
- Restrictions on overseas R&D costs, with relief only available in limited circumstances where it would be wholly unreasonable to undertake the work in the UK.
Enhanced R&D Intensive Support
ERIS provides additional support to loss-making, R&D-intensive SMEs whose qualifying R&D accounts for 30% or more of their total expenditure.
Under ERIS:
- Companies can claim an additional 86% deduction of qualifying R&D costs when calculating their trading loss.
- That loss can generate a payable tax credit of up to 14.5% of the surrenderable loss.
- Combined, this can deliver an effective cash benefit of up to around 27% of qualifying R&D expenditure for eligible, loss-making SMEs.
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Contact us to arrange an initial no-obligation consultation to find out how Knight can assist with your next claim or add value to your existing claim process.