Date09 Nov 2023
CategoryR&D Tax Credits
While Research & Development (R&D) tax credits can reduce corporation tax on profits above £250,000, companies should avoid trying to use the Government-backed tax relief scheme as a ‘backdoor’ way to avoid paying more.
Valid R&D claims have the additional benefit of reducing corporation tax liabilities on annual profits of £250,000-plus. Successful claims, which can often amount to tens of thousands of pounds, appear as a credit in the tax part of the profit/loss account and are exempt from corporation tax.
The original 19% corporation tax rate still applies to profits below £50,000, with marginal relief on profits up to the £250,000 threshold. Then the new 25% rate – a 6% rise – kicked in from 1 April of this year.
With corporation tax rates having increased to 25% when profits are over £250,000, valid R&D claims have the additional benefit of reducing corporation tax liabilities. Whilst the rate of relief has reduced, the tax relief available is still substantial.
Companies thinking of reducing the tax take on annual profits through R&D tax reliefs need to ensure they get professional advice to avoid falling foul of HMRC, which is rightly targeting fraudulent claims.
As noted in September, nearly half of submissions made by agents across the UK in relation to tax relief claims for R&D were declared invalid by HMRC since a new documentation requirement came into effect from 8 August.
Firms most impacted by the new upper 25% rate in corporation tax are likely to be in the services sector, which accounts for nearly 80% of total UK economic output. Businesses which invest in plant and machinery are less likely to be affected because of capital allowances.
HMRC publicly states that its aim is to pay 85% of SME payable tax credits within 40 days.
According to official figures, Government support for R&D through the tax reliefs rises to more than £9 billion in 2027-28 from £6.7 billion in 2020-21.
The R&D tax credits system, set up to promote innovation and growth, goes back to 2000 when the EU established what is now known as the SME Scheme, aimed at small to medium size companies.
In the UK large companies lobbied heavily for a second scheme - this led to the formation of the large company scheme in 2002, the RDEC (Research and Development Expenditure Credit) scheme.
Accounting for the two schemes has remained completely different; in the SME scheme all adjustments are made on the corporation tax return, while RDEC is calculated as a percentage of a company’s qualifying R&D expenditure and is taxable as trading income.
HMRC accounts for 2021 to 2022 estimate the level of error and fraud within corporation tax R&D reliefs to be £469 million or 4.9% of related expenditure; this comprises £430 million (7.3%) in the SME scheme and £39 million (1.1%) in the RDEC scheme.
There are Government proposals to merge the two R&D tax relief schemes and potentially revamp permissible qualifying activity and claimant criteria.
We recently surveyed 42,000 client businesses as part of our response to the proposals. Nearly 13% of respondents thought the proposals for a single scheme to be positive, just over 51% considered it negative and nearly 36% were undecided as to its potential impact.
Tim Croft, National Head of R&D, wrote to the government detailing the results of these two surveys and adding the firm’s own technical queries.
He said at the time: “Although most of our feedback has indicated that our clients are largely in favour of a single scheme, they are generally not convinced that the current proposals are the best way ahead.”
The UK’s R&D tax relief regime is constantly evolving and has been facing substantial change in recent months, making it increasingly difficult to navigate.
If you require assistance with an R&D claim or would like to discuss any challenges you’re experiencing with the new submission requirements, please get in touch with a member of our specialist team or your usual Azets advisor.