Will an update to R&D relief encourage more investment?

A recent article has highlighted the need for the UK’s Research & Development (R&D) tax relief to be updated.

The Accountancy Age article features a response from The Institute for Chartered Accountants in England and Wales (ICAEW) which notes that R&D is over 20 years old and could benefit from aligning with the HMRC’s Making Tax Digital (MTD) plans.

With digital transformation accelerated due to COVID-19, cloud software, internet-based tech and plenty more developments are at the forefront and could potentially benefit from R&D relief.

The ICAEW raises key points in how the R&D tax relief could be updated including:

• The schemes could be adapted to provide financial support closer to the time of expenditure, rather than after completion of the tax return submission process
• R&D tax relief could be incorporated into the wider grant subsidies system

A couple of years ago we wrote about the UK’s R&D tax relief and how the UK was falling behind the R&D spending target.The Confederation of Business Industry (CBI) indicated that the UK would not hit its R&D spending target of 2.4% of GDP, based on its current rate of growth, until 2053 – the actual deadline for this target is 2027. The CBI is also calling on the government for further investment for growth to raise R&D investment to 3% of GDP.

So, with these calls for an overhaul of the current R&D relief system, could this be the inspiration needed to get companies to invest in R&D rather than outsourcing or putting off until perhaps it is too late and a business lags behind its competitors?  

What is R&D tax relief?

Currently, Research and Development (R&D) reliefs are for companies working on innovative projects in science and technology. The project may research or develop a new process, product or service or improve on an existing one. The government lays out the detail of how companies need to clarify what their project achieves including:  

• looking for an advance in science and technology
• having to overcome uncertainty
• trying to overcome this uncertainty
• unable to easily work out by a professional in the field

You can access all the detail here at www.gov.uk

The current types of R&D tax relief vary depending on company size and whether the project has been subcontracted to you.

You can claim small and medium enterprises (SME) R&D relief if your company fits the following criteria:

• less than 500 staff
• a turnover of under 100 million euros or a balance sheet total under 86 million euros

Large companies can claim a Research and Development Expenditure Credit (RDEC) for R&D projects.

If your business does quality for R&D relief but makes a loss, there is also the possibility to ‘surrender the loss’ and claim back a tax credit of 14% of the loss instead of carrying it forward, which may be better for cash-flow depending on your business.

Work with McKenzies accountants, Oxted 

When you work with an accountancy firm like McKenzies, we delve into your business to prepare your annual accounts showing everything your company owns and owes at the end of your year’s trading.

You will have a record of tax made on profits and capital gains, calculated before dividends are paid. But, most importantly, we will have assessed and highlighted if you are eligible for claiming R&D relief. If so, it is beneficial to your claim to work with a reputable and recommended R&D firm so that a claim can be made efficiently with good quality information provided. McKenzies can refer you to a specialist firm if necessary.

It’s worth noting that HMRC may enquire about any claim so it’s worth checking initially if the R&D firm you use offers a tax investigation protection service that will cover their fees in dealing with the enquiry. Talk to our team of accountants if you have any questions.