The Government created Research and development (R&D) tax credits to reward those companies in the UK that are investing in innovation.
The credits offer a valuable source of income to help businesses invest in R&D, hire new talent and grow, by reducing their tax bill.
- If your company is profitable – it could reduce your corporation tax bill
- If your company has been profitable – you could claim a repayment of company tax
- If your company is loss-making – you could claim immediate cash from HMRC
- Your company could improve its cash flow
- Your company’s financial statements could appear healthier
Innovative companies are not just in the manufacturing, technology, engineering and pharmaceutical sectors.
Don’t think that just because you aren’t working in some high-tech sector that you cannot claim R&D relief.
This initiative is open to businesses in almost every sector if they can prove they have made an advancement.
HMRC have received successful claims in several sectors including:
- Professional Services – e.g. Solicitors
- Waste Management and Recycling
- Web Design
In fact, within the government’s accepted research and development definition, R&D doesn’t even have to have been successful to qualify and you can also include work undertaken for a client, as well as your own projects.
- Creating new products, processes or systems
- Improving operational and logistical efficiencies
- Making significant improvements to existing products, processes or systems
- Integrating or updating products, processes or systems
The above will be done to achieve a competitive advantage and deliver cost or time efficiencies.
Depending on whether you are a small to medium-sized enterprise (SME) or large company, the scheme that you apply for can differ.
The scheme classifies a business as an SME if it has fewer than 500 staff and either not more than £100 million turnover or £86 million gross assets.
Conversely, any business with more than 300 members of staff and either more than £100 million turnover or £86 million gross assets is classed as a large business.
SMEs must apply for the SME R&D tax credit scheme, while large companies can apply for Research and Development Expenditure Credit (RDEC) – although where an SME works alongside a large company on R&D, they may be able to claim Research and Development Expenditure Credit or even both schemes.
SMEs can claim up to 33p for every £1 spent on qualifying R&D activities.
Large companies can claim up to 10p for every £1 spent on qualifying R&D activities.
The amount of support you receive via the tax credit system depends on your R&D spend and several other factors.
In order to calculate the R&D tax credit, you will need to identify qualifying expenditure and look at the relevant rate for your business in order to create a calculation for your enhanced expenditure.
When you deduct your enhanced expenditure from your taxable profits or add it to your loss, it will result in one of three outcomes:
- a Corporation Tax reduction if you are profit-making
- a cash credit if you are loss-making
- or a combination of the two
Research & Development Tax Credits: What you need to know
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