New R&D tax credit restrictions have recently come into force meaning change for you and your business. Having long encouraged companies to invest in innovative research projects and notable technological advancements, these R&D regulation changes are not to be feared, with restrictions fluctuating from one year to the next. 

Taking these changes into consideration will be critical for your business in order to optimise the amount of R&D tax credits you can receive. So, to properly prepare for the future, follow our handy guide and let Williamson & Croft help you optimise your R&D tax credit allowances before your deadline.

What are R&D tax credits?

Let’s start with the basics, R&D tax credits refer to the corporation tax relief set up by the UK government, and the money back a company might receive after investing in R&D companies. Helping to reduce your company’s overall tax bill, the tax relief programme means that you can claim up to 27% of your R&D expenditure depending on how large and profitable your company is. 

Rewarding your investment in forward-thinking innovation, the programme helps to fund future R&D projects, reducing the expenditure of exciting new companies looking to influence and change the industry. 

For an overview that covers off everything you need to know about R&D tax credit restrictions and how we can guide you to fulfil your next claim, read through our R&D tax credit page. 

Which projects qualify for R&D tax relief? 

There are two main areas where R&D tax credits can be claimed: 

  • Modifying an existing product, process or service
  • Or, changing new products, processes or services.  

Furthermore, your R&D projects don’t have to be successful for you to claim for tax relief either, and you can also claim for projects that you undertook on behalf of other clients. For comprehensive details on the rules around which projects are and are not considered for R&D tax relief consult HMRC’s website.

Why have the R&D tax credit restrictions changed? 

In 2023, the rates of R&D tax relief were shuffled, with businesses claiming on the R&D SME scheme getting a lower rate, and businesses claiming R&D Expenditure Credit (RDEC) receiving higher rates. These changes were made by the government in response to businesses abusing the system, with the alterations being implemented in the hopes that proper compliance would be met by all.  

What are the R&D tax credit restrictions?

The newly implemented R&D tax credit restrictions cover several areas, with each change being related to three main categories.

  1. HMRC communications

HMRC have made it a little harder for you to be able to make an R&D tax claim and will only accept a first-time claim if they are not notified of your intention to do so first. This applies to businesses claiming under RDEC or the SME schemes for the very first time. Notifying HMRC should be done through the online form on their website and should be done no later than six months after you file a claim. 

Extra information is also being requested by HMRC in order for you to fulfil your claim. All the necessary details, including the business type, VAT registration number, employer PAYE reference number and UTR, will be listed in the form on GOV.UK, which needs to be filled in before you file your Corporation Tax return. 

  1. Qualification parameters 

Not all costs and activities can be covered by R&D tax credits and it can be tricky to decipher exactly what you are and are not covered by. 

  • Tax credits can be claimed from the development and research of an R&D process, but the costs of making the product and producing the marketing will not result in tax credits.
  • Only direct and immediate R&D expenses can be claimed, which means anything that comes under the ‘Investment’ remit, such as rent and the creation and acquisition of a patent, are not covered by the tax relief programme. 
  • The duplication of an existing R&D product or procedure is also exempt from tax credits. Aesthetic changes to enhance the visual appeal of a product will also result in ineligibility. On the other hand, the invention of a new product that aims to carry out aesthetic changes would qualify for R&D tax credits.

To further qualify for tax credits, your business will also need to provide several pieces of documented evidence to support your R&D claims. Keeping your history of R&D activity up to date is therefore essential in order to back up your claim, with appropriate records including technical assets, cost sheets, project documentation and any test results that were gained during the process. 

  1. R&D PAYE cap

When claiming for R&D tax credit, you need to know about the R&D PAYE cap. Essentially, this cap limits the amount of tax credit a small or medium-sized enterprise can claim back to £20,000 plus 300% of its total Pay as you Earn (PAYE). This also includes National Insurance Contributions (NICs) liability for the period of your claim. 

It’s possible that a company may be exempt from the PAYE cap if their employees are creating or managing Intellectual Property (IP) and their spending with subcontracted affiliates or external workers (EPWs) doesn’t exceed 15% of its R&D expenditure.

As companies can only claim three times the amount that they spend on their workforce, this pay cap will impact SME businesses that have a low payroll expenditure. Companies who subcontract will also only be able to rely on the £20,000 provision, and businesses that are loss-making will also miss out on receiving tax credits. 

What Williamson & Croft can do for you

The most important thing you and your business can do in order to achieve a successful R&D claim is to be as informed as possible about the new restrictions. Being prepared long before you make the R&D claim will mean that time and budgets can be strategically allocated to improve the strength of your application. 

Williams and Croft are the perfect partners to help guide you through the intricacies of this R&D tax credit procedure, supporting your application every step of the way with years worth of experience in this field to make sure your claim is perfectly optimised. 

Experts in all things accounting, as well as comprehensive cover of the R&D tax procedure, we also provide a range of useful guides to benefit your business, including: 

Contact our team of R&D tax credit specialists at Williamson & Croft today.