Eligibility conditions for claiming R&D tax relief

Qualifying for this transformative Innovation Incentive requires a number of conditions to be met. Some of these conditions are straight forward to assess; whilst others are more interpretive requiring deeper and broader thought to understand.

In this article, I’ll provide an overview and context to the main criteria, with links to complimentary articles or materials that go on to consider the more involved requirements in further detail.  

R&D eligibility criteria – your starting point

As shown in the above diagram, all conditions are interlinked and must be present to qualify for this relief. For ease, I’ve grouped these under six focal areas:

• Entitlement to relief
• Relevant R&D
• Expenditure
• Timing of R&D work and expenditure incurred
• The meaning of R&D for tax purposes
• Activity types in scope

1. Entitlement to relief

For UK Companies only

This tax relief is only available to companies that are within the scope of UK Corporation Tax – for the most part, we are looking at UK incorporated companies.  

It’s worth noting here a couple of arrangements around partnerships:

• Whilst a partnership as an entity is not able to claim this relief, it is possible for a company that is a member of a partnership (i.e. a corporate partner) to claim R&D tax relief in proportion to its partnership share.
• For companies that work together in partnership on an R&D project e.g. in a joint venture arrangement, R&D tax relief may be considered and claimed separately by each corporate entity if it is otherwise eligible.  

Trading status for tax purposes

Your company must be carrying on a “trade” for tax purposes, or be intending to do so (start-ups for example). The UK tax regime recognises various different types of income classes: rental income, investment income, interest income and trading income.  

The tax rule bases income classes vary and a company may have more than one type of income that it reports on its company tax return. Research and development tax relief is provided as part of trading income (Schedule D case I for the tax technical readers). 

Considering whether a revenue stream amounts to a trade is not explored further in this article.  The trading status of your company will have been considered by your accountant or generalist corporate tax adviser to correctly complete your company tax return.  

Therefore, a quick look over your latest tax figures will show you if your company has a trade – look for the presence of a schedule D case I section, which may also be categorised under a heading entitled along the lines of “Trade” or “Adjusted Trading result” for example.    

We are therefore typically looking at businesses that provide goods and/or services via an active UK incorporated company that report trading profits (or losses) in annual company tax returns to HMRC.

2. Relevant R&D activities

Having considered whether the activities carried on by your company amount to a “trade”, the tax rules require that the research & development work relates to your trade (whether you are actively trading or undertaking endeavours that will amount to a trade) and will bring about a commercial benefit via growth and expansion.  

3. R&D expenditure

Building on 1 and 2 above, your company must have incurred expenditure on the research and development work that is relevant to your trade. But not all expenditure is eligible for relief. Remember that it is the quantification of expenditure that generates the cash benefits for your business.

Eligible expenditure means:

• Meets the criteria of one or more of the qualifying cost categories; and

• Is expensed to the profit and loss account; or

• Is revenue in nature but is recognised as an intangible asset in the Statutory Accounts (NB a claim under s1038 CTA 2009 is also required to treat qualifying R&D expenditure as revenue in nature for tax purposes)

Tax technical point: it is not enough to incur expenditure on qualifying expenditure categories. The deductibility of the expenditure for tax purposes must also be considered, a concept not definitively prescribed in Tax law. Tests that have emerged from case law are considered and this is not always clear cut, particularly around the treatment of software development.  

Note also that whilst the accounting classification of expenditure (i.e. capitalised on the balance sheet or charged to the profit and loss account) may be persuasive, it does not determine the treatment of expenditure for tax purposes.

4. Timing of R&D work and expenditure incurred

An R&D tax relief claim is made on an accounting period by accounting period basis. An accounting period is the period covered by your company statutory accounts – normally 12 months. This is because relief is given via a claim made on the face of the UK corporation tax return.  

I think it's also worth pointing out here that R&D tax relief is a standard type of tax claim permitted by tax legislation, it is not tax avoidance or a tax scheme with a registered number that needs reporting. Sometimes I am asked this by companies due to the generosity of cash funding offered by this relief.

The expenditure on the qualifying cost categories must have been brought into account during the accounting period in which you are claiming R&D tax relief and/or an R&D tax credit. To clarify, R&D tax relief is claimed where companies are profitable and benefit from a reduction in corporation tax payable; R&D tax credits may be claimed where a company is loss making and wishes to effectively cash those in early - termed surrendering losses for a cash payment.

Because qualifying expenditure is linked to the qualifying activities, it follows, generally, that you must have undertaken the qualifying work (see points 5. and 6. below) during the accounting period for which you are claiming.  There may be some anomalies to the timing of the release of expenditure compared to the timing of the work in certain circumstances.

The key thing here is to know if you are in time to claim relief. From 1 April 2023, there are two time limits to be mindful of:

• Notification window – 6 months from the end of the company accounting period.
• Statutory deadline to claim – 2 years from the end of the company accounting period.

The notification window may not be relevant, but if it is then failure to meet the notification window will prevent you from being able to put in an R&D claim, even where the statutory claim window has not passed.

Notification requirement – new for accounting periods beginning on or after 1 April 2023

If you are a UK company that has never claimed before, or not made an R&D claim for any of your last 3 accounting periods, you will only have 6 months from the end of your company's year end to notify HMRC that you intend to make an R&D claim. This is separate from and in addition to the statutory two-year time limit for making the actual claim.   

If your company has not claimed R&D tax relief before or has not claimed for the last 3 accounting periods, then it would be wise to start thinking about, and take advice around, eligibility criteria by reference to your company’s circumstances before your accounting period comes to an end. 

5. Within the scope of the meaning of R&D for tax purposes

There are 3 pillars to the meaning of R&D for tax purposes, which must all be present for work to qualify:

1. Project: If you do not have a ‘project’ - “a planned piece of work that is designed to find information about something, to produce something new, or to improve something” then the work cannot qualify. 
2. Technological or Scientific Uncertainty that needs to be resolved. Without technological uncertainty the work cannot qualify. It is not enough to simply seek an advance in technology, if it is easy to do within baseline knowledge and capabilities then the project won’t qualify.
3. Advance in Science or Technology beyond “as is” capabilities in your industry (as a whole). If you have a project and experience significant technological uncertainty in meeting that aim, then it is likely that seeking an advance in scientific or technological knowledge and/or capabilities is present.

A good R&D tax adviser will be able to help you with implementing a process to identify qualifying work whilst simultaneously capturing the information required to demonstrate and explain how the work meets the R&D requirements. 

This requirement is perhaps the most challenging, misunderstood and at times an opinion dividing part of qualification criteria. For a more in-depth look at this requirement, see related article seeking an advance through resolving Scientific or Technological uncertainty.

6. Activities carried out within the scope of R&D boundaries

Care is needed to correctly identify the start and end points of qualifying project work for the purposes of claiming this tax relief. You’ll need to know which activities qualify to link associated expenditure on qualifying cost categories.

Correctly identifying the boundaries of R&D therefore forms the foundations for getting claim quantification correct, and maximising the value of the relief by avoiding over claiming and under claiming.

This area is explored further in related article Boundaries of R&D for R&D Tax Relief Purposes.

Quick reflection

Points 1-4 are put forward for your consideration first. Simply because, even if your work meets the definition of the meaning of R&D for tax purposes and you have undertaken activities that are within the scope of the boundaries of R&D, if you fail any of these conditions, you have no route to relief.  

Point 5 is one of the more complex elements of eligibility criteria – so if you have no route to relief, it will be a waste of your time looking into this further.

Key points to take away

• Commercial activities must amount to a trade 
• The trade sits within or is attributed to, a UK company 
• The development work you are undertaking must intend to support growth for your trade
• If all the above elements are met but you have not incurred expenditure in a qualifying category, or you are out of time to claim, then there is no point in even starting to think about whether what you have done falls within the meaning of R&D.  
• The commercial project will not qualify in its entirety
• Not all types of business activities can be included
• The purpose of activities must directly or indirectly contribute to achieving the advance sought   

Working with a specialist R&D chartered tax adviser

Copper Tax collaborates with people in businesses, large and small (starting out or established) to put together authentic claims for R&D tax relief.

Working closely with the right people in your company, together we'll identify your qualifying projects and carefully link up associated expenditure to maximise the cash benefits of this tax relief with 100% compliance.

I'll help you understand the eligibility criteria and guide you through a way to assess your work against this. We'll look at the areas where you have incurred costs and how these costs can be attributed to the qualifying aspects of your work. 

I'll take the facts we'll gather throughout the assessment process and produce a robust report for submission to HMRC in support of your claim.Solely focused on R&D tax relief, this tax advisory service compliments the mainstream tax compliance services you buy elsewhere.

Think you have an R&D claim?

Understanding the nuances of tax legislation when it comes to R&D tax relief can be hard. If you hit a road bump in preparations, get in touch.

If you’d like to discuss a potential R&D project, book a call to explore your eligibility and start your tax claim journey.

You can understand more around the reason why many businesses value an exploratory call here.

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