R&D tax credits are a golden opportunity for businesses to recoup some of their investment into innovative projects.
Whether you’re a startup trying to break new ground or an established company looking to improve existing processes, claiming R&D tax credits can provide substantial financial benefits.
Let’s dive into understanding these credits and the benefits they offer.
What are R&D tax credits?
Tax credits for R&D, short for research & development, were introduced to boost innovation within businesses. Essentially, R&D tax credits are the UK Government’s way of saying, “Keep innovating, and we’ve got your back!”
However, a significant number of businesses are unaware of these credits, and even though claims are increasing, some might be eligible without even realising it.
Who can benefit from R&D tax credits?
Contrary to popular belief, R&D tax credits aren’t just for those making scientific breakthroughs in a laboratory.
Businesses across sectors – from construction and manufacturing to eCommerce startups – can claim these credits.
Whether you’re tackling complex problems or merely enhancing traditional methods, you might be eligible.
Understanding the two R&D tax credit schemes
The Government offers two distinct R&D tax credit schemes:
SME R&D tax credit scheme
- Who’s it for? Small to medium-sized enterprises.
- Eligibility: Businesses with fewer than 500 employees which don’t exceed either a turnover of €100 million or a balance sheet total of €86 million.
- Benefits: SMEs can reclaim a significant portion of their R&D-related expenses, either as a reduction in their tax bill or, for those not in profit, as a cash credit.
RDEC scheme
- Who’s it for? Larger companies that don’t fit the SME criteria.
- Benefits: These entities can claim a tax credit for their R&D expenditure.
How much can you save?
Smaller companies: the SME scheme
- Enhancement rate: 86%.
- Tax credit rate for loss-making companies: 10%.
What this means for profitable SMEs: For every £100 of qualifying R&D expenditure, you could potentially enhance your deductions by an additional £86. If you factor in the 25% corporation tax rate, this means you could save up to £21.50 on your tax bill for every £100 spent on R&D.
What this means for loss-making SMEs: If your company isn’t making a profit, you could potentially receive a tax credit worth 10% of your qualifying expenditures. This translates to a £10 credit for every £100 spent on R&D. This can be increased to 14% for companies spending more than 40% of their costs on R&D.
While these rates provide a basic guideline, the actual savings your business can achieve may vary based on other factors, such as your total R&D expenditure, profitability status, and specific activities undertaken.
To ensure maximum benefit, it’s always wise to seek expert advice, especially when navigating the nuances of the R&D tax relief system.
Larger companies: the RDEC Scheme
- Tax credit rate: 20%.
What this means: If you’re a larger company, for every £100 of qualifying R&D expenditure, you could potentially receive a tax relief or credit of £20 through the RDEC scheme. The same applies for loss-making companies.
What qualifies for R&D?
For a project to be considered R&D, it should aim at advancements in science or technology, confront real uncertainties, and be genuinely innovative.
When calculating a claim, typically, the following costs qualify at least:
- Staff costs: Including researchers’ salaries, supporting staff pay, and overheads like NICs and pensions.
- Collaboration expenses: If an expert third party aids your R&D venture, you may be able to claim the costs involved in collaborating with them.
- Software & consumables: Procured especially for R&D purposes.
- Prototyping: Essential in many R&D endeavours. However, if you sell your prototype, the revenue should be deducted from the claim.
Claiming R&D tax credits
Claiming involves a few steps. The exact process will depend on which scheme you claim.
- Verify your eligibility: Ensure your activities resonate with the Government’s R&D guidelines.
- Maintain detailed records: Document every aspect of your R&D venture.
- Calculate: Sum up all qualifying costs.
- Complete the CT600 Form: Here, detail your R&D expenses in your corporation tax return.
- Submit: Dispatch your CT600, your R&D tax credit claim, and supporting documentation to HMRC.
- Wait: Once HMRC gives the nod, you’ll benefit from a tax reduction or receive a cash credit.
Expert advice on R&D tax credits
Claiming R&D tax credits can be transformative for businesses with significant R&D expenditure.
If you believe you qualify, delving into this opportunity could yield substantial savings.
And remember, if in doubt, reach out for professional guidance to navigate the R&D tax credit waters – they’re fairly convoluted for some businesses that aren’t absolutely sure of what expenditure qualifies.
Talk to us about claiming R&D tax credits.