Are you missing out on this valuable tax incentive? Find out how you could receive assistance from the Government for developing new products, processes or services.
* Source: Latest HMRC Research and Development Tax Credits Statistics September 2021
What are Research and Development (R&D) Tax Credit for SMEs?
The R&D Tax Credits Legislation was introduced by the Government, in the Finance Act 2000.
The initiative is designed to stimulate our economy, by incentivising businesses to invest in research and development. This is achieved by rewarding them for that investment, by reducing their Corporation Tax (CT) liability and/or a payable tax credit.
What research and development qualifies for R&D Tax Credits?
Firstly, there are two question that you need to ask:
Are you producing new or improved products, processes or services?
Did the design and development of those products involve technological and scientific uncertainty for which the solutions 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, 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.
What expenditure is eligible for R&D Tax Credits?
Staffing Costs
Software
Independent Research
Subcontractors
Consumables
Clinical Trials
Prototyping
Travel
If you’re unsure, why not give us a call?
It only takes our team around 20 minutes to determine if you are eligible or not.
The benefit to SMEs claiming R&D Tax Credit
Under the SME R&D tax credits scheme you can increase the allowances for Corporation Tax, by a further 130% of your qualifying expenditure.
If you spend £75,000 on eligible R&D, you will receive a tax deduction of £97,500. At a Corporation Tax rate of 19% this equates to an additional tax saving of £18,525 in addition to the normal Corporation Tax allowance adding up to 230%.
If the company does not pay Corporation Tax in the period of the claim you can still enjoy a cash refund of 14.5%. The third alternative is to bank the tax credits for use when the company does make a profit, which would give a benefit of 19% (or whatever CT rate prevails at the time).
R&D Tax credits claimed under the SME scheme, should be reflected in the tax charge in the accounts. As a result, any repayments are not taxable income.
R&D Tax credits claimed under the SME scheme, should be reflected in the tax charge in the accounts. As a result, any repayments are not taxable income.
What is R&D Credit relief?
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How is R&D tax credit calculated under the SME Scheme?
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Under the SME scheme, the company receives a second tax deduction for the qualifying costs on top of the normal tax deduction that the company receives through its accounts. The second deduction goes through the company’s corporation tax return and is currently 130% of the qualifying costs. This gives a total effective tax deduction for the qualifying costs of 230%.
The second tax deduction will reduce the taxable profits of the company giving relief at the company’s tax rate, currently 19%.
This means that for every £1 spent the company receives an extra tax saving of 24.7p on top of the normal tax saving of 19p.
If the extra tax deduction is greater than the taxable profits, a tax loss will be created. Normally, a tax loss can be carried back against taxable profits in the previous 12 months or used to relieve taxable profits of other group companies. Any remaining loss is then carried forward to be used against future profits.
With a loss produced by R&D tax credits we have the option of surrendering the loss for cash rather than carrying it forward. The rate of surrender is less than the rate received if the loss is carried forward, 14.5% rather than 19% but most companies prefer to have a lower amount of cash sooner rather than a higher amount later.
The loss that can be surrendered is restricted to the loss relating to R&D not general trading.
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What are the SME and RDEC Schemes?
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The SME scheme applies to companies who satisfy the requirements of the small and medium sized enterprise scheme.
The RDEC applies to any company that does not qualify for the SME scheme.
This includes companies who fail to meet the size requirements and therefore can only claim under the RDEC or companies who may have individual projects which do not qualify under the SME scheme if, for example, they are receiving certain grants or they have work subcontracted to them by a company that does not qualify under the SME scheme.
In the latter case, this means that a company that meets the size requirement but has projects that do not qualify can claim under both schemes.
Is the R&D Tax Credit scheme for SMEs, right for you?
The legislation is quite complex but broadly speaking, the criteria for a company to claim under the SME scheme, is that they employ less than 500 full time members of staff. Alongside this, the company would need a turnover of less than €100m or balance sheet assets of less than €86m.
If you do not meet the criteria to be classified as an SME, don’t worry. You may be still eligible for relief under the Research and Development Expenditure Credit (RDEC) scheme.
Fiscale’s Step-by-Step guide to R&D Tax Credit claims
When working with Fiscale, we make the process of claiming SME R&D Tax Credit as simple and painless as possible.
Assessment
We establish if the research and development that you are undertaking, meets the criteria as set out by HMRC. This is usually done over the telephone, followed by a face-to-face meeting. This is to ensure that you are eligible and if so, we will then start the claims process.Technical meeting
Following the initial meeting to establish eligibility, we will then arrange a follow up to get to know (and understand) the work that you are undertaking. Typically, this meeting takes two hours and involves going though potentially qualifying projects in detail. At this meeting we will talk to the members of your team who are involved in the R&D, along with your financial team. We will also outline what is involved in processing a claim and the level of input required by your team.Draft report
As a result of the in depth technical meeting, we are then able to draft a report that is based on our discussions and all of the information that you have provided. We will be looking at every angle of your R&D, to ensure that we maximise the value of your claim.Submission
Once the report has been agreed by you, we then submit it to HMRC and deal directly with them on your behalf. You have the peace of mind that the report will be an accurate representation of your activities. We will also ensure that it is presented in a way that meets the requirements of HMRC.Review
Once the claim has been made, we will review your systems to help identify any areas of record keeping to support future claims. As a result, all future claims can be streamlined, making the process more straightforward.
Call Fiscale Today!
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.