In order to encourage innovation in the UK, HMRC offers SMEs an extra 130% deduction on R&D revenue expenditure including staff costs, materials, software, utilities, and 65% of subcontractor costs.
SMEs have less than 500 employees and a turnover of fewer than 10 million euros.
With regard to large companies, they can claim an above-the-line tax credit of 13% which is deducted from the corporation tax liability like double tax relief.
R&D claims by SMEs have totaled £5.9 billion but HMRC has found that fraudulent claims have increased to 4.9% or £469 million.
HMRC is now cracking down with the formation of the anti-fraud team and the introduction of additional checks.
As a result, payments will now be paid after 2 months instead of 30 days later.
In addition, for accounting periods starting after 1 April 2023, companies will have to pre-notify their intention to claim for R&D no later than 6 months before the year-end.
This rule will only apply to companies claiming the R&D tax relief for the first time.
The main errors involve the definition of what constitutes R&D which should extend the overall knowledge or capability in a field of science or technology. Production of a prototype or creation of intellectual property provides evidence of R&D. Routine or cosmetic improvements are not qualifying R&D.
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