September 25, 2024 Investing in R&D
Research and Development (R&D) spending in the UK in 2020 was estimated to be in the region of 3% of GDP. This sets the UK above the OECD and EU average, but fourth in the G7 behind the USA, Japan, and Germany. When it comes to R&D spending in the UK pharmaceutical companies lead the way but in 2021 banks also accounted for three of the top ten places.
However, R&D investment is not confined to large organisations. Whilst companies working in the field of the arts, humanities or social sciences are generally not eligible for R&D tax reliefs, organisations in other fields may qualify if they are engaged in projects which aim to make an advance in science or technology.
In order to claim, companies are required to prove how their project meets the criteria to research or develop a new process, product or service, or improve an existing one. Examples of expenditure which can be claimed in respect of qualifying projects include staff costs, relevant consumables such as power or water, or data licences. Companies should be aware that for accounting periods beginning on or after 1 April 2024 the R&D regime changed with two distinct schemes which were based on company size merging into one scheme, supplemented by an ‘enhanced R&D intensive support’ scheme.
The regulations can be complex and HMRC are only too well aware that R&D tax relief is an area which is open to fraud or inadvertent mis-claims. Accordingly, companies need to ensure that they not only qualify for tax reliefs but also have a full suite of supporting documentation in order to be in a position to meet any HMRC investigation into claims.
Those investigations are one reason why the ICAEW’s Tax Faculty has highlighted the danger of HMRC’s approach causing ‘significant disruption’ to genuine claimants. In a briefing note to MPs on 16 September, the ICAEW urged that immediate action be taken to avoid the danger of ‘collateral damage’ as a result of investigations and a consequent reduction in R&D development within the UK. In its briefing note the ICAEW cite cases of businesses either moving R&D activity offshore or withdrawing compliant claims in order to avoid the ‘disproportionate cost’ of having to defend HMRC challenges.
Elemental provides an R&D tax relief advisory service for our clients. This includes not only pre-claim analysis and reporting but also post-claim follow-ups and recommendations in areas such as intellectual property and client contracts to ensure that companies are able to optimise the benefits available from their R&D initiatives.
