02 Oct 2020

What are R & D Tax Credits?

Sam Stephens

Businesses all over the UK are missing out on the benefits that claiming R&D Tax Credits could offer their company. Any business that performs research and development could be eligible to make a claim – so what are you waiting for?

What are R&D Tax Credits?

Since 2000, HMRC have offered an incentive for innovative UK businesses to conduct research and development (R&D) to create new products, processes and services, by providing either a Corporation Tax reduction or cash repayment for a proportion of their R&D expenditure. HMRC currently offer this via two schemes:

SME Scheme – businesses are eligible for the SME R&D Tax Credits Scheme if they have less than 500 full-time employees and less than €100 million turnover.

RDEC Scheme – businesses are eligible for the RDEC R&D Tax Credits (Research & Development Expenditure Credit) Scheme – formally known as the large company scheme – if they have over 500 full-time employees and more than €100 million turnover.

The two schemes result in all UK-registered businesses that would usually pay Corporation Tax potentially being eligible to make a claim, as long as they’re undertaking R&D that seeks to achieve an advance in overall capability or knowledge.

How much can you claim in R&D Tax Credits?

Depending on the size and status of your business, the amount you can claim will differ:

SME Scheme:

  • If your company is loss-making, you can claim up to £33 for every £100 of eligible R&D expenditure.
  • If your company is profit-making, you can claim up to £24.70 for every £100 of eligible R&D expenditure.

RDEC Scheme:

  • Loss-making and profit-making businesses can claim up to £10.50 for every £100 of eligible R&D expenditure.

The SME Scheme is notably more generous, but large businesses should not be discouraged.

What is eligible R&D expenditure?

Eligible expenditure for R&D Tax Credit claims falls under 4 categories:

  • Staff costs
  • Materials costs
  • Software costs
  • Subcontract costs (not included under the RDEC Scheme)

There are slight differences between the SME and RDEC Scheme for what is considered an eligible cost in these categories and what proportion of the costs can be claimed. An R&D Tax Specialist will be able to discuss these with you in more detail when checking your eligibility.

Does Grant Funding affect your ability to claim R&D Tax Credits?

Yes, receiving Grant Funding can affect your R&D Tax Credit claim. Due to State Aid Rules, grant funded projects need to be assessed on a case-by-case basis to determine whether a claim can be made; for example:

Under the RDEC Scheme, a SME company receiving a Notified State Aid Grant may be able to claim against the entire project costs for expenditure on items such as materials, consumables and staff.

If the grant is Non-Notified State Aid then a SME business may also be able to claim via the SME Scheme for the self-funded portion of the project costs.

How do you claim R&D Tax Credits?

Companies that have never made a R&D Tax claim before should check their eligibility as soon as possible. You have 2 years to make a retrospective claim, so every day that ticks by, means you’re ever closer to losing another year’s tax relief! Speak to your Accountant or an R&D Tax Specialist to discuss making a claim for previous years.

Many UK businesses have already looked into R&D Tax and may already be claiming – our only question to you is: “are you sure you’re receiving the maximum amount of benefit?” R&D Tax legislation is complicated and notoriously difficult to decipher. A R&D Tax Specialist will be able to help you work out whether you’re claiming everything you should be.

Should I look into making a claim?

The simple answer is yes. Companies should begin by asking themselves 3 questions:

  1. Are you a UK-registered company?
  2. Have you performed R&D in the last 2 years?
  3. Would you like to receive some cash-back for those R&D activities?

If your answer to all of those questions is yes, you should begin looking at building your R&D Tax Credit claim with an Accountant or R&D Tax Credit Specialist. Contact us here.

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