Calculate R&D Tax Credit claims – Hints & Tips

Understanding how to calculate R&D Tax Credits claims can be a difficult task; especially if you’re not aware of the intricacies of the schemes or what HMRC are looking for in your calculations. Our expert consultants have put together their key steps for a successful R&D Tax Credits claim calculation.

Key Steps to Calculate R&D Tax Credit

1.     Gather your financial information for the claim period in one place

It’s crucial to get the foundations of your claim correct, before beginning any of the calculations. Spend some time gathering the claim period’s financial information, such as employee’s salary payments, invoices from suppliers for materials, software, and sub-contractors – if you use them for R&D.

For many businesses, this is a relatively easy step as it’s commonplace to use business accounting software packages, which keep track of payments in and out and allow reports to be exported for the R&D Tax claim calculations. Typical reports that can be useful for calculating an R&D Tax Credits claim are a balance sheet and profit and loss statement.

2.     Are you loss-making, breaking even, or profit-making?

The next critical part of your R&D Tax Credits claim foundations is whether your business is loss-making, breaking even, or profit-making. This will directly affect the percentage of tax relief your business will receive.

Within the SME Scheme, for small and medium size businesses:

• If your company is loss-making, you can claim up to £33.40 for every £100 of eligible R&D expenditure
• If your company breaks even, you can claim a minimum of £18.90 for every £100 of eligible R&D expenditure
• If your company is profit-making, you can claim £24.70 for every £100 of eligible R&D expenditure.

3.     Look into how much time has been spent on R&D

It’s highly likely that even your most intensive R&D team members do not spend 100% of their time performing research and development – everyone takes time away from their desk, right? HMRC know this too, and will be skeptical of your claim if it includes 100% of all employees’ time focused on R&D.

The key to a successful claim is an accurate calculation of employees’ time spent on R&D. If your company uses timesheets, you can use them to see how much time is dedicated to R&D for each team member, and calculate their salary costs accordingly. Alternatively, you can ask your team members to tell you the proportion of their time they spend on the projects.

Bear in mind that for claims from April 2021 onwards, there is also a PAYE cap you must take into consideration for your entire claim value. The PAYE cap is £20,000 + 3 times your PAYE and NIC costs for salary that financial year; so getting a correctly calculated salary cost is extremely important to your overall claim.

4.     Understand the rules regarding sub-contract, software, materials costs

While there are a huge array of costs that are eligible to be claimed for in an R&D Tax Credits claim, there are some rules you must follow when calculating the cost of them for your claim:

1. Consumable and transformable materials – Materials consumed in the production of prototypes or during trials or transformed to facilitate R&D (this includes utilities). Much like salary costs, utilities have to be apportioned correctly; for example, if your facility has multiple purposes/departments, you should apportion the cost of utility bills for the areas that are used for R&D.
2. Software costs – these costs can only be included when the software is directly employed in the resolution of R&D uncertainty.
3. Subcontracted R&D – Your company can claim for the payments made to unconnected subcontractors that perform R&D on your behalf. The eligible cost is generally 65% of the invoice cost, as this accounts for any profit margin the subcontractor will have applied.

Calculate your R&D Tax Credit on our website

To assist companies who may not know where to start when beginning their R&D Tax Credits calculations, we have an online resource – our R&D Tax Calculator, which allows you to put in a few simple figures and get an estimate of how much your claim could be worth.

Our team are also happy to discuss your R&D Tax claim with you, and help you understand all the areas of expenditure that you could claim for – you can get in touch using our contact form.