Tax relief if you create

Over the years, tax reliefs have been introduced to support businesses involved in technology, creative industries and intellectual property. However, HMRC continues to refine and tighten the qualifying conditions, so staying up to date is essential. Tax rules do not stand still.

One of the most valuable tax incentives for eligible businesses is relief for qualifying research and development (R&D) expenditure and expenditure on qualifying creative works.

Developing technology - research and development tax credits

R&D tax relief can provide significant tax benefits to companies undertaking qualifying research and development. A company does not necessarily need to be profitable to benefit, although the relief available depends on the applicable scheme and the company’s circumstances.

R&D can include activities undertaken to achieve an advance in science or technology by resolving scientific or technological uncertainty. Examples may include developing new or improved products, processes, materials or devices, and testing solutions where the outcome is not readily deducible by a competent professional.

Our understanding of the R&D tax relief rules enables us to provide focused commercial advice when reviewing and drafting your legal agreements, including agreements relating to research, development and intellectual property.

How to claim R&D Relief

The relief available depends on when the company’s accounting period began and whether it meets the relevant eligibility conditions.

For accounting periods beginning before 1 April 2024, the previous SME and Research and Development Expenditure Credit (RDEC) schemes may apply. For accounting periods beginning on or after 1 April 2024, the main schemes are the merged R&D expenditure credit scheme and Enhanced R&D Intensive Support (ERIS). The applicable rules should be checked carefully before a claim is prepared.

R&D relief for small and medium-sized enterprises

For relevant purposes, an SME will generally have fewer than 500 employees and either annual turnover not exceeding €100 million or a balance sheet total not exceeding €86 million. However, the calculation must take account of linked and partner enterprises, which can affect whether a company qualifies.

For accounting periods beginning on or after 1 April 2024, eligible loss-making, R&D-intensive SMEs may qualify for ERIS. This allows an additional deduction of 86% of qualifying expenditure, subject to the relevant conditions, giving a total deduction of 186%. Other companies may qualify under the merged RDEC scheme instead.

The rules differ for earlier accounting periods, so the relevant accounting period and eligibility conditions must be established before calculating the relief.

Loss making companies under the SME scheme

Depending on the applicable scheme and the company’s circumstances, R&D relief may reduce taxable profits, increase a tax loss or allow a company to claim a payable credit. This can help support cash flow, although the amount and timing of any payment depend on the statutory requirements.

Companies should check the conditions applying to their particular claim, including any requirements relating to the company’s financial position, the expenditure and the payment of costs.

Larger companies and linked enterprises

The merged RDEC scheme is available to companies that meet its conditions, including many larger businesses. It provides a taxable expenditure credit calculated at 20% of qualifying R&D expenditure for most companies.

An SME may also be treated as a large enterprise for these purposes where it has linked or partner enterprises. The employee, turnover and balance-sheet tests must therefore be assessed using the relevant aggregation rules. The calculation may require a proportionate or full inclusion of figures from other enterprises, depending on the relationship.

We can help you understand how these rules apply and work alongside your accountants where appropriate.

What is qualifying R&D expenditure?

Where the company and its project meet the relevant conditions, certain expenditure may qualify for R&D tax relief. Depending on the applicable rules, this can include:

• Staff costs relating to qualifying R&D activities;
• Software used directly for R&D;
• Consumable materials and utilities used in qualifying activities;
• Certain subcontracted R&D costs; and
• Payments to external workers involved in qualifying R&D.

Not all costs qualify, and restrictions can apply to subcontracted work, overseas expenditure and other categories. The rules governing who can claim for subcontracted R&D have also changed under the merged scheme.

The relief is calculated under the relevant scheme and may take the form of an expenditure credit or an enhanced deduction, with the resulting tax benefit depending on the company’s circumstances.

HMRC advance assurance for R&D expenditure

Eligible small companies making their first R&D tax relief claim may be able to apply to HMRC for advance assurance. The process allows HMRC to consider the company’s proposed R&D activities and expenditure before the claim is made.

Advance assurance is voluntary and is not available to every company. An application should clearly explain the business, the proposed R&D and the costs involved.

Which companies can apply for advance assurance?

The scheme is intended for companies making their first R&D tax relief claim that meet HMRC’s criteria, including having turnover below £2 million and fewer than 50 employees at the time of application. Eligibility should be checked against HMRC’s current guidance before applying.

Benefits of seeking advance assurance from HMRC

Where HMRC grants advance assurance, it provides assurance that qualifying claims for the first three accounting periods will be accepted in accordance with the matters agreed, subject to the scheme’s terms and conditions. It does not remove the need to meet the relevant requirements or ensure that every item of expenditure will qualify.

If advance assurance is refused or the company does not apply, it may still be possible to claim R&D relief through the usual process, provided the statutory requirements are met.

Developing creative works

Companies working in eligible creative industries may be able to claim tax relief or expenditure credits to reduce their Corporation Tax liability or obtain a payable credit. The applicable scheme depends on the type of production, when it began and whether the relevant conditions are satisfied.

Creative industries reliefs cover a range of activities, including:

• Film and animation;
• High-end television and children’s programmes;
• Video games;
• Theatre productions;
• Orchestral productions; and
• Qualifying museum and gallery exhibitions.

Qualifying expenditure

The company must meet the relevant conditions for the particular relief or expenditure credit. These may include requirements concerning the company’s role in the production, the nature of the work, certification or cultural tests, and the amount of qualifying UK expenditure.

The calculation of qualifying expenditure differs between schemes. Companies should therefore identify the correct relief before estimating the potential benefit.

Benefits of claiming creative industry tax relief

Depending on the production and the applicable scheme, a qualifying company may claim an expenditure credit based on a percentage of qualifying expenditure. The credit is generally brought into account for Corporation Tax purposes and can be used against tax liabilities, with any remaining amount potentially payable or available for other permitted uses.

The rules are complex, and some activities and costs are excluded. For example, productions made for advertising or promotional purposes do not qualify for certain creative industry reliefs. We can help you assess eligibility, understand the relevant requirements and prepare your business to make a compliant claim.