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 Report October 2018
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.
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.
It only takes our team around 20 minutes to determine if you are eligible or not.
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.
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.
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.
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.
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.