The government introduced a tax incentive for large companies, imaginatively called ‘The Large Company Scheme’ in 2002 to encourage investment in research and development and drive innovation in the UK. Large companies are given a taxable credit of 12% (11% prior to the 1st January 2018) on qualifying expenditure on research and development.
The initiative has been supported by successive governments. This is because the underlying philosophy is that innovation and the development of new technologies, is fundamental to the success of UK Plc.
An HMRC report on the Evaluation of Research and Development Tax Credits, shows that for every £1 paid by HMRC on R&D tax relief, generates R&D spending of up to £2.35.
As a result of the evolving R&D Tax Credit schemes, the Large Company scheme was changed to the Research and Development Expenditure Credit (REDC) scheme in 2013. Following this, there was a gradual phase out of the original Large Company scheme, however, since April 2016, this has been completely replaced by REDC.
If you can answer yes to the following two questions, there is a high probability that you qualify.
Are you producing new or improved products, processes, services or software?
Did the design and development of those products involve some uncertainty for which the answers were not obvious?
If the answer to both questions is yes, the chances are that you could qualify for R&D Tax Credit. As a result, answering this is probably the most complex part of the R&D Tax Credit process, as it’s an area open to interpretation. Thankfully, this is where our specialist skills, along with our extensive experience is particularly useful!
Read our blog “What qualifies as R&D?” for some examples of qualifying R&D.
The legislation is quite complex, however, the criteria for a company to claim under the RDEC scheme, is that they employ more than 500 full time members of staff. Alongside this, the company would need a turnover of more than €100m or over €86m gross assets on their balance sheet.
If you do not meet the criteria to be classified as a large company for the RDEC scheme, don’t worry. You may be still eligible for relief under the SME scheme.
Under the RDEC scheme, 13% of qualifying expenditure on R&D can be claimed (Before 1st April 2020 the rate was 12%).
As RDEC is taxable this means that the net benefit will be 9.7 pence for every £1 spent on qualifying research and development.
Loss making companies can still benefit from RDEC through a net of tax cash credit.
The position for companies claiming under the RDEC scheme is slightly different to those claiming under the SME scheme. As a result, the income is taxable; therefore, any RDEC acts as payment against the tax bill rather than reducing it.
When working with Fiscale, we make the process of claiming SME R&D Tax Credit as simple and painless as possible.
Why not contact us today to discuss your business’ R&D tax relief? It only takes our team around 20 minutes to determine if you are eligible or not.