The history of R&D Tax Credits in the UK

The original guidelines on the meaning of research and development published. The meaning of R&D issued in the 2000 DTI guidelines. The Department of Trade and Industry drafts the first iteration of the definition of R&D for tax purposes, which HM Treasury publishes. This makes the DTI guidelines the official definition of R&D for tax purposes.

R&D capital allowances are introduced. The Capital Allowances Act 2001 is published, providing relief for capital expenditure on R&D. R&D capital allowances (RDAs) are introduced to replace Scientific Research Allowances. RDAs provide tax relief for capital expenditure on R&D. They use the same definition of R&D as R&D tax credits (2000 DTI Guidelines). Have you read our blog post on R&D and capital allowances?

R&D tax relief for large companies is introduced. The large company scheme is introduced. Following the successful introduction of the SME R&D tax credit scheme, an equivalent incentive for large companies is introduced. The relief available for large companies is similar to that for SMEs, however the rate of relief is lower (7.5%) and there is no payable tax credit for large companies. Have you read our blog post on R&D and capital allowances?

SME scheme minimum spend removed Minimum spend on eligible R&D in an accounting period reduced from £25,000 to £10,000. Until now, the minimum spend condition prevented smaller companies from claiming R&D tax credits. It also prevented companies in the early stages of a project claiming and those where finance was limited were out too, regardless of the nature of the project. Now the minimum spend threshold is removed. This is great news for the smallest businesses. The minimum spend is later abolished completely.

SME scheme minimum spend removed Minimum spend on eligible R&D in an accounting period reduced from £25,000 to £10,000. Until now, the minimum spend condition prevented smaller companies from claiming R&D tax credits. It also prevented companies in the early stages of a project claiming and those where finance was limited were out too, regardless of the nature of the project. Now the minimum spend threshold is removed. This is great news for the smallest businesses. The minimum spend is later abolished completely.

SME scheme minimum spend removed Minimum spend on eligible R&D in an accounting period reduced from £25,000 to £10,000. Until now, the minimum spend condition prevented smaller companies from claiming R&D tax credits. It also prevented companies in the early stages of a project claiming and those where finance was limited were out too, regardless of the nature of the project. Now the minimum spend threshold is removed. This is great news for the smallest businesses. The minimum spend is later abolished completely.

New costs that can be recouped are introduced Expenditure on consumable items and computer software is classified as qualifying expenditure for both SMEs and large companies. Expenditure on the materials consumed or transformed in the R&D process can now be included in your claim. Materials that are consumed or transformed in during the R&D process are defined as consumables: this category includes water, fuel, and power. This is great news for companies who invest in building prototypes as part of their R&D efforts. It is a major positive for manufacturers who invest in process development projects which involve running R&D. Expenditure on computer software involved in R&D activities can now also be included. Have you read our Knowledge Bank article on what costs qualify for R&D tax credits?

New costs that can be recouped are introduced Expenditure on consumable items and computer software is classified as qualifying expenditure for both SMEs and large companies. Expenditure on the materials consumed or transformed in the R&D process can now be included in your claim. Materials that are consumed or transformed in during the R&D process are defined as consumables: this category includes water, fuel, and power. This is great news for companies who invest in building prototypes as part of their R&D efforts. It is a major positive for manufacturers who invest in process development projects which involve running R&D. Expenditure on computer software involved in R&D activities can now also be included. Have you read our Knowledge Bank article on what costs qualify for R&D tax credits?

How to claim for intangible assets New rules are introduced on how to claim for intangible assets. Revenue R&D expenditure capitalized as an intangible asset can now be claimed in the year it is incurred, rather than as amortised. This important change ensures that companies who had capitalised R&D costs could still maximise the benefit of their R&D tax credit claims.

How to claim for intangible assets New rules are introduced on how to claim for intangible assets. Revenue R&D expenditure capitalized as an intangible asset can now be claimed in the year it is incurred, rather than as amortised. This important change ensures that companies who had capitalised R&D costs could still maximise the benefit of their R&D tax credit claims.

Corporation Tax rate change

Definition of SME amended The SME definition is revised, doubling the thresholds for headcount, annual turnover and balance sheet assets. Headcount limit is increased from 250 to 500. Annual turnover limit is increased from €50 million to €100 million. The limit for balance sheet total is increased from €43 million to €86 million. This widening of the scope of the SME R&D tax credit means more companies can benefit from the more favourable relief-rates for SMEs. It also increased the scope for international companies to benefit from the UK’s R&D tax incentives. Have you read our KnowledgeBank article on what an SME is?

Definition of SME amended The SME definition is revised, doubling the thresholds for headcount, annual turnover and balance sheet assets. Headcount limit is increased from 250 to 500. Annual turnover limit is increased from €50 million to €100 million. The limit for balance sheet total is increased from €43 million to €86 million. This widening of the scope of the SME R&D tax credit means more companies can benefit from the more favourable relief-rates for SMEs. It also increased the scope for international companies to benefit from the UK’s R&D tax incentives. Have you read our KnowledgeBank article on what an SME is?

The Intellectual Property (IP) condition for SMEs is removed Prior to this change, under the SME R&D tax credit scheme, SMEs claiming R&D tax credits had to show that the IP generated vested with it. A positive move that simplified the eligibility criteria for SMEs, particularly around the complex area of IP.

Online filing for Corporation Tax made compulsory By 2011, most companies were already using online software to file their Corporation Tax returns. R&D tax credit claims form part of a company’s tax return, therefore the most common way to file an R&D tax credit claim is online. This also speeds up the processing times as it minimizes the manual intervention at HMRC’s end of the process.

Online filing for Corporation Tax made compulsory By 2011, most companies were already using online software to file their Corporation Tax returns. R&D tax credit claims form part of a company’s tax return, therefore the most common way to file an R&D tax credit claim is online. This also speeds up the processing times as it minimizes the manual intervention at HMRC’s end of the process.

Online filing for Corporation Tax made compulsory By 2011, most companies were already using online software to file their Corporation Tax returns. R&D tax credit claims form part of a company’s tax return, therefore the most common way to file an R&D tax credit claim is online. This also speeds up the processing times as it minimizes the manual intervention at HMRC’s end of the process.

Restriction of R&D tax credits removed PAYE and NIC liabilities cap (that has been part of the SME scheme since the start) is now removed. Liabilities cap removed that previously limited the amount of payable credit a company could claim to the total value of its PAYE and NIC liabilities. Removal of this cap part of a number of positive measures for R&D tax credit claims. The government re-introduced a PAYE and NIC cap in the 2018 Autumn Budget, to address potential abuse of R&D tax credits.

Restriction of R&D tax credits removed PAYE and NIC liabilities cap (that has been part of the SME scheme since the start) is now removed. Liabilities cap removed that previously limited the amount of payable credit a company could claim to the total value of its PAYE and NIC liabilities. Removal of this cap part of a number of positive measures for R&D tax credit claims. The government re-introduced a PAYE and NIC cap in the 2018 Autumn Budget, to address potential abuse of R&D tax credits.

Restriction of R&D tax credits removed PAYE and NIC liabilities cap (that has been part of the SME scheme since the start) is now removed. Liabilities cap removed that previously limited the amount of payable credit a company could claim to the total value of its PAYE and NIC liabilities. Removal of this cap part of a number of positive measures for R&D tax credit claims. The government re-introduced a PAYE and NIC cap in the 2018 Autumn Budget, to address potential abuse of R&D tax credits.

Restriction of R&D tax credits removed PAYE and NIC liabilities cap (that has been part of the SME scheme since the start) is now removed. Liabilities cap removed that previously limited the amount of payable credit a company could claim to the total value of its PAYE and NIC liabilities. Removal of this cap part of a number of positive measures for R&D tax credit claims. The government re-introduced a PAYE and NIC cap in the 2018 Autumn Budget, to address potential abuse of R&D tax credits.

Restriction of R&D tax credits removed PAYE and NIC liabilities cap (that has been part of the SME scheme since the start) is now removed. Liabilities cap removed that previously limited the amount of payable credit a company could claim to the total value of its PAYE and NIC liabilities. Removal of this cap part of a number of positive measures for R&D tax credit claims. The government re-introduced a PAYE and NIC cap in the 2018 Autumn Budget, to address potential abuse of R&D tax credits.

Corporation Tax decreases The main rate of Corporation Tax reduces from 24% to 23%. Small profits rate remains at 20%, while the main rate is decreased as the government moves towards one rate of Corporation Tax for all UK companies. Changing Corporation Tax rate affects the claim benefit both SMEs and large companies receive. For SME claims, a reducing Corporation Tax rate erodes the claim benefit profit-makers receive. Conversely, under RDEC, the Corporation Tax reduction increases the generosity of RDEC.

Corporation Tax decreases The main rate of Corporation Tax reduces from 24% to 23%. Small profits rate remains at 20%, while the main rate is decreased as the government moves towards one rate of Corporation Tax for all UK companies. Changing Corporation Tax rate affects the claim benefit both SMEs and large companies receive. For SME claims, a reducing Corporation Tax rate erodes the claim benefit profit-makers receive. Conversely, under RDEC, the Corporation Tax reduction increases the generosity of RDEC.

Corporation Tax decreases The main rate of Corporation Tax is cut from 23% to 21%. The small profits rate remains at 20%, while the main rate moves another step closer to meeting it. The changing Corporation Tax rate affects the claim benefit both SMEs and large companies receive. For SME claims, a reducing Corporation Tax rate erodes the claim benefit profit-makers receive. Conversely, under RDEC, the Corporation Tax reduction increases the generosity of RDEC.

Corporation Tax decreases The main rate of Corporation Tax is cut from 23% to 21%. The small profits rate remains at 20%, while the main rate moves another step closer to meeting it. The changing Corporation Tax rate affects the claim benefit both SMEs and large companies receive. For SME claims, a reducing Corporation Tax rate erodes the claim benefit profit-makers receive. Conversely, under RDEC, the Corporation Tax reduction increases the generosity of RDEC.

Corporation Tax simplified The main rate of Corporation Tax is reduced to 20% and is merged with the small profits rate. Prior to this, the rate of Corporation Tax a company paid was dependent on its taxable profits. There were two rates: the main rate and the small profits rate. There was also marginal relief for some companies. This complexity affected the benefit rate a company received for its R&D tax credit claim, which created uncertainty for claimants. Part of a long-term plan from the government, from this point all UK companies pay Corporation Tax at the same rate.

Corporation Tax simplified The main rate of Corporation Tax is reduced to 20% and is merged with the small profits rate. Prior to this, the rate of Corporation Tax a company paid was dependent on its taxable profits. There were two rates: the main rate and the small profits rate. There was also marginal relief for some companies. This complexity affected the benefit rate a company received for its R&D tax credit claim, which created uncertainty for claimants. Part of a long-term plan from the government, from this point all UK companies pay Corporation Tax at the same rate.

Corporation Tax simplified The main rate of Corporation Tax is reduced to 20% and is merged with the small profits rate. Prior to this, the rate of Corporation Tax a company paid was dependent on its taxable profits. There were two rates: the main rate and the small profits rate. There was also marginal relief for some companies. This complexity affected the benefit rate a company received for its R&D tax credit claim, which created uncertainty for claimants. Part of a long-term plan from the government, from this point all UK companies pay Corporation Tax at the same rate.

Corporation Tax simplified The main rate of Corporation Tax is reduced to 20% and is merged with the small profits rate. Prior to this, the rate of Corporation Tax a company paid was dependent on its taxable profits. There were two rates: the main rate and the small profits rate. There was also marginal relief for some companies. This complexity affected the benefit rate a company received for its R&D tax credit claim, which created uncertainty for claimants. Part of a long-term plan from the government, from this point all UK companies pay Corporation Tax at the same rate.

Large company super deduction scheme abolished The large company super deduction scheme is abolished. After a transition period where both the large company super deduction scheme and RDEC ran in parallel, the super deduction is abolished for expenditure incurred after this date. Most large companies transition to RDEC at the earliest opportunity, to access the additional benefits it offers, including a higher benefit rate, greater visibility and a cash credit for loss-making companies.

Corporation Tax cut The main rate of Corporation Tax is decreased from 20% to 19%. The changing Corporation Tax rate affects the claim benefit that both SMEs and large companies receive. For SME claims, a reduced Corporation Tax rate erodes the claim benefit that profit-makers receive. Conversely, under RDEC, the Corporation Tax reduction increases the generosity of RDEC.

RDEC rate increased The RDEC rate is increased to 12%. The main RDEC rate is increased incrementally for the second time since its introduction, taking the RDEC benefit rate to 10%. This increase in generosity is good news for large companies – as well as the SMEs who also use the RDEC R&D tax credit scheme. Large companies should be particularly enthusiastic about it, as they already benefited from an increase in generosity when the new 19% Corporation Tax rate came into effect on 1 April 2017. Have you read our blog on the Autumn Budget 2017? Read more

Online service introduced to support RDEC claims Following the launch of HMRC’s online service for SMEs, the technology was extended to support large company (RDEC) claims too. Although using this new service is voluntary, it provides businesses and their advisers an excellent guide as to what information HMRC is looking for in support of R&D tax credit claims made by large companies. This service summarises the results of the RDEC claim process. But importantly, it is not a substitute for this process. This includes identifying a businesses’ qualifying R&D project(s), calculating their qualifying costs and the amount of any relief or credit owed. Have you read our KnowledgeBank article, What records do I need to see for an R&D tax credit claim?

Consultation – UK Research and Development Roadmap The government publishes a roadmap for improving R&D investment in the UK. This includes ambitious promises to make the UK the centre of global research. Particularly in health, environment and economic recovery from the coronavirus. Read more R&D tax consultations and ForrestBrown’s responses to them.

Consultation – UK Research and Development Roadmap The government publishes a roadmap for improving R&D investment in the UK. This includes ambitious promises to make the UK the centre of global research. Particularly in health, environment and economic recovery from the coronavirus. Read more R&D tax consultations and ForrestBrown’s responses to them.

Government responds to the R&D tax relief consultation Following the Autumn Budget 2021 and recent consultation, the government announced reforms to R&D tax reliefs. The consultation response includes: Expanding qualifying expenditure to include data and cloud costs. Refocusing the relief towards innovation in the UK. Steps taken to target abuse and improve compliance. Read more R&D tax consultations and ForrestBrown’s responses to them.

Chancellor’s Spring Statement prioritises innovation In his 2022 Spring Statement, Rishi Sunak responded to feedback on the proposed changes to R&D tax relief: The scope of R&D tax relief will be expanded to cover data and cloud computing costs. Data storage and work on pure mathematics will also attract relief. Restrictions on overseas R&D will go ahead, but with key exceptions where it is necessary for R&D activity to be carried out away from the UK. The Chancellor also teased an increase in the generosity of the Research and Development Expenditure Credit (RDEC) and renewed his emphasis on getting “value for money” from the UK’s R&D incentives.