What are Research and Development Tax Credits?

Research and development (R&D) tax credits are a valuable government tax relief that rewards UK companies for investing in innovation.

  • Companies that spend money developing new products, processes or services; or enhancing existing ones, are eligible for a cash payment and/or Corporation Tax reduction.

  • R&D tax credit rates are the equivalent of up to 33p for every £1 of qualifying expenditure.

  • They can be used as an alternative to innovation grants for research and development funding. Sometimes they can complement them too.

What counts as R&D?

For tax purposes, HMRC R&D requirements are purposefully broad. Whatever size or sector, if your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you may be carrying out qualifying activity. This could include:

  • Creating new products, processes or services.

  • Changing or modifying an existing product, process or service.

This means that if you’re not sure your project is scientifically or technologically possible, or you don’t know how to achieve it in practice, you could be resolving uncertainties and therefore qualify for R&D tax credits.

Within the accepted HMRC research and development definition, R&D doesn’t have to have been successful to qualify. You can also include work undertaken for a client as well as your own projects.

What R&D costs can I claim for?

When putting together an R&D tax credit claim, we look for the following types of qualifying R&D expenditure:

  • Expenditure on staff including salaries, employer’s NIC and pension contributions.

  • Expenditure on subcontractors and freelancers.

  • Expenditure on materials and consumables including heat, light and power that are used up or transformed by the R&D process.

  • Expenditure on some types of software.

  • Reimbursed expenses

The above costs have to be presented to HMRC in a manner that clearly illustrates how these qualify in respect to your company and the rules of the scheme. Vantage have vast experience in presenting these figures in a way that HMRC can quickly see that they are qualifying and the reasons why. We also know what shouldn't be included in a claim (plant hire, for example).

How much will I receive?

The scheme issues payment through you corporation tax submission and depends on which scheme your company will fall into, either SME or RDEC/Large.

SME Scheme

When we have identified the qualifying costs they are then uplifted by 130%. This figure is then used in your corporation tax computation as a cost which reduces the amount of tax due. If you have paid corporation tax for the year you are claiming for, a portion or all of this will be repaid back to you. The R&D costs my mean that your company is loss making, which you can either carry forward, or surrender for a cash credit of 14.5% of the loss. You can still make a claim if you were already loss making before the R&D figures are applied, as some or all of the loss can be cashed in at 14.5%. See the examples below:

Profit Making

Original Profit: £200,000

Tax Due (19%): £38,000

Qualifying Costs: £100,000

Uplift: £130,000

Profit after R&D: £70,000

Tax Refunded: £30,400

Profit to Loss

Original Profit: £100,000

Tax Due (19%): £19,000

Qualifying Costs: £100,000

Uplift: £130,000

Profit after R&D: £-30,000

Tax Refunded: £19,000

Loss cashed in @ 14.5%: £4,350 

or

Carry forward loss to be utilised @ 19%

Loss Making

Original Loss: £-200,000

Tax Due (19%): £0

Qualifying Costs: £100,000

Uplift: £130,000

Loss after R&D: £-330,000

As the new loss is greater than the sum of the qualifying costs + uplift, the total enhanced R&D figure of £230,000 is applied

Tax credit @14.5%: £33,350

RDEC/Large Scheme

If you are a large company  (greater than 500 staff and either more than €100 million turnover or €86 million gross assets), then the calculation is different and can be utilised in different ways, depending on the structure of the company (the benefit can still be cashed in, even if other companies within the group have tax liabilities).

  • An RDEC tax credit is worth 12% of your qualifying R&D expenditure.

  • The credit is taxable at the normal Corporation Tax (19%) rate which effectively means the benefit is worth nearly 10p for every £1 you spend on qualifying R&D.

  • The benefit can be shown ‘above the line’ (ATL) – this means it is visible as income in your accounts.

  • The credit is offset against your tax liability or, in some circumstances, is payable in cash.

 

Using the above an example spend of £500,000 in R&D would result in a credit of £48,600.

Think You May Qualify?

If you think you may qualify, please contact us for a no obligation consultation

01527 758145

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