How can R&D Tax Credits benefit your business?
‘What are R&D Tax Credits?’ It’s a question that should be asked more often in the world of business, especially since it’s an incentive to encourage innovation in UK businesses – a cash injection for any research and development that a business has completed.
Sadly, however, unless you’re a business supported by a team of accountants or business advisors, you’re unlikely to know just how much of a cash injection you could be receiving.
If you’re an active scroller on social media, or you like to keep up with the news, you’ll likely be aware that a recent report found manufacturers especially could unknowingly be missing out on this cash injection – and we’re talking thousands of pounds!
But it’s not just manufactures, and we’re here to take a look at how all businesses can take advantage of the rewards for research and development and continue their innovative work.
R&D Tax Credits defined
Research and Development Tax Credits are an incentive developed by the government in a bid to encourage and reward UK businesses for continuing innovation – a vital factor in the strength of the economy.
Whilst they’re available to businesses of all sizes who actively participate in research and development, there is certain criteria which any claimant must meet.
To make a claim under the R&D SME Regime
The finance tests must be met:
- Employ less than 500 employees, and
- Have a turnover of less than £100m, or
- Have an £86m balance sheet.
If the above criteria are met, the project for which businesses are claiming for will then need to be considered. Some of the most popular projects include:
- Development of processing and handling techniques.
- The design, testing and trialling of prototypes and demonstration plant.
- Scaling up of production processes
- Adaption to include new or alternative materials – driven by legislation, environmental aims or operational efficiency.
- Integration of new technology with old systems.
In summary, for an activity to qualify it must be technological or scientific in nature to qualify.
It’s important to note that if the project in question has received state aid, subsidies or grants, then that project won’t be considered via the SME Regime scheme.
To make a claim under the RDEC Regime
If you’re a business who doesn’t meet the criteria above, don’t worry. It doesn’t necessarily mean you’ll miss out. It’s a little more complicated, and a little less beneficial, but you could still claim 9.7% cash back under the RDEC Regime.
Again, you’ll need to discuss the project itself if you’re looking to claim via this regime.
How do R&D Tax Credits work?
As we mentioned, the whole point of R&D Tax Credits is to reward those businesses innovating to help the economy and individuals thrive, so it’s no surprise that the schemes are centred around financial gains.
Let’s explore.
Small and medium sized enterprises (SME) R&D Relief
SME R&D relief allows companies to:
- Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction: and/or
- Claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss
For example, let’s assume a company has incurred £100k of R&D qualifying expenditure:
| £’000 | |
| The net profit before tax is | 250 |
| The tax due is (see below for info) | 22.8 |
| The profit after tax would be | 227.2 |
The corporation tax computation would therefore be:
| £’000 | |
| Net profit before tax | 250 |
| Less R&D relief | 130 (130% in addition to what has been claimed) |
| Adjusted profit before tax | 120 |
| Corporation tax at 19% | 22.8 |
Research and Development Expenditure Credit
This replaces the relief previously available under the large company scheme.
Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects, and it can also be claimed by SMEs and large companies who have been subcontracted to do R&D work by a large company.
The RDEC is a tax credit which used to be 11% of your qualifying R&D expenditure up to 31 December 2017, but in 2018 it was increased to:
- 12% from 1 January 2018 to 31 March 2020, and
- 13% from 1 April 2020
Looking at a typical scenario then, let’s assume that £100k of R&D qualifying expenditure has been incurred.
| £’000 | |
| The Net profit before tax would be | 250 |
| 13% RDEC on expenditure would be | 13 |
| The adjusted profit before tax would be | 263 |
The corporation tax computation would therefore be:
| £’000 | |
| Net profit before tax | 263 |
| Corporation tax at 19% | 50 |
And the tax payable:
| £’000 | |
| Corporation tax due | 50 |
| Less tax credit | (13) |
| Corporation tax payable | 37 |
More information on R&D Tax Credits can be found here https://www.gov.uk/guidance/corporation-tax-research-and-development-rd-relief, but if you’d prefer a friendly chat with one of our experts, please get in touch.
Author: Rajeev Dewedi