How does the R&D tax relief claim process work?

Research & Development (R&D) tax relief can provide valuable financial support if you are a business that is investing in innovation and developing new processes, products or services. However, a series of recent reforms to the rules means that understanding exactly how the R&D tax relief regimes work and when the many different changes come into force may be of critical importance to your financial projections.

New measures introduced

Since August 2023, UK companies claiming R&D tax relief must now submit an Additional Information form digitally through a new online portal, separate from their Corporate Tax Return. This form is required for every R&D claim, even for ongoing projects, and must include detailed information about the project, a cost breakdown, and the name of the advisor who assisted with the claim. It must also be signed by a senior officer of the company. Failure to submit this form renders the R&D claim invalid, and HMRC will remove the claim from the company's tax return if they believe it was made in error. While this form provides significant detail, large businesses are still encouraged to submit an additional R&D report to explain the methodology and cost breakdowns used.

Since 1 April 2023, companies must also notify HMRC of their intent to claim R&D tax relief in advance, from the start of the accounting period up until six months after its end. This rule aims to prevent speculative last-minute claims. If a company fails to submit the required Claim Notification form when necessary, their claim will be invalidated. However, certain exceptions exist, such as when a claim is made within six months of the accounting period or a claim was made within the previous three years. The Claim Notification form provides a summary of the planned R&D activities but does not require proof or documentation at that stage.

Extending costs that qualify for R&D relief

R&D expenditure categories have been extended to include the costs of datasets and cloud computing. However, there are exceptions such as when these relate to a “qualifying indirect activity” where you are including a small proportion of non-technical personnel time attributable to qualifying R&D projects. R&D in pure mathematics will also qualify for relief and can form part of the qualifying R&D activities of the claimant from accounting periods beginning on or after 1 April 2023. The Guidelines on the definition of R&D now state:

‘Mathematical techniques are frequently used in science. From April 2023 mathematical advances in themselves are treated as science for the purposes of these Guidelines, whether or not they are advances in representing the nature and behaviour of the physical and material universe’.

This definition is, perhaps, rather wider than previously expected. For example, the development of new mathematical models, the study of mathematical structures and symmetries may qualify alongside the exploration of new mathematical concepts and the foundations of mathematics itself.

Refocusing R&D relief to UK activities

Changes originally announced for accounting periods beginning on or after 1 April 2023 are now to take effect for costs incurred in accounting periods starting on or after 1 April 2024. R&D activity will have to be physically located in the UK for the costs to be included in R&D tax relief claims. UK companies who currently claim R&D costs paid to overseas group companies or third parties may no longer be able to include these costs in their claims. The costs of externally provided workers (EPWs) will be limited to work undertaken in the UK where workers are paid a salary under the PAYE/NIC scheme.

There are specific exemptions where work outside the UK is permitted for geographical, environmental, social or regulatory/legal requirements. HMRC’s statement published with the draft legislation gives examples such as deep ocean research and clinical trials, and therefore, by inference, this would include medical-tech trials in specific patient groups, international telecoms testing, or technology designed for extreme environments.

Companies will not be able to claim that overseas costs fall within the exemptions where the main reason that the work is being carried out overseas is due to cost constraints or that the business does not have suitable workers in the UK.

Practical steps to take

Greater scrutiny of R&D claims means detailed preparation is crucial. To improve the success of R&D tax claims, companies are advised to follow best practices such as clearly defining their projects, submitting well-structured technical reports, and completing all necessary sections of the corporation tax return. If you outsource R&D work overseas, review your financial projections and arrangements as it may become more cost-effective to carry out R&D activities within the UK. HMRC has emphasised the importance of submitting additional supporting documentation, as this can expedite the processing of claims and reduce the risk of challenges. Inaccurate or fraudulent claims may result in penalties, so working with an experienced R&D tax specialist is highly recommended.

Find out more about how the R&D changes work in practice and the support available on our website.