Are you constantly developing your business? Could you save tax by claiming Research and Development (R & D) tax credits?
R&D Relief is a Corporation Tax relief that may reduce your company tax bill.
Alternatively, if your company is small or medium-sized, you may be able to choose to receive a tax credit instead, by way of a cash sum paid by HM Revenue and Customs (HMRC).
The Government have set aside approximately £1.5bn per year for companies they deem to be undertaking qualifying R&D activities.
Rate of tax relief or credit for small companies
The R&D tax credits available to small and medium enterprises (SMEs) have been substantially increased over recent years.
The tax relief on allowable R&D costs incurred on or after 1 April 2015 is 230% (increased from 225%) – that is, for each £100 of qualifying costs, your company could have its Corporation Tax profits reduced by an additional £130 on top of the £100 spent.
If instead there’s an allowable trading loss for the period, this can be increased by 130% of the qualifying R&D costs – so that’s £130 for each £100 spent. This loss can be carried forward in the normal way, but only if you choose not to convert it to tax credits.
The generous increases to the relief since it was first introduced have made claiming for it a lot more valuable to SMEs.
What Are R&D Tax Credits?
R&D tax credits enable companies that incur costs in developing new products, processes or services to receive a cash payment or tax deduction. The R&D tax credit scheme is a HMRC incentive designed to encourage innovation and increased spending on R&D activities by companies operating in the UK. The Government has expressed its desire to make the UK the most attractive place to start and invest in innovative companies and as a result the incentives for companies to innovate have continued to improve.
R&D tax credits were first introduced in 2000, although only available to SMEs initially, so this is not a new form of tax relief. However, in recent years the rates have increased significantly to further incentivise companies to claim.
Am I an SME, can I claim and what could I save?
For a company to be regarded as an SME it must have less than 500 staff and meet at least one of the following; a turnover of below £70 million per annum or gross assets of less than £61 million.
Who is eligible?
The two key criteria in determining who is eligible for R&D tax credits are ‘innovation’ and ‘uncertainty’.
What expenditure is allowable?
If your company and the project both meet the necessary criteria, then it is possible to claim relief on revenue expenditure, and in some cases also capitalised revenue expenditure, across three main areas; staff costs (gross salary, employers NIC, pension contributions etc), subcontractors/freelancers and consumable items (i.e. heat, light & power, materials and equipment ‘used’ and/or ‘transformed’ by R&D process).
Are we eligible for R&D tax credits?
Many business owners and finance departments will wonder ‘are we eligible for R&D tax credits?’ The answer is often yes. If your company is taking a risk by innovating, improving or developing a process, product or service, then it can qualify. R&D tax relief scheme is relevant to a wide number of industry sectors – absolutely no company should be discounted on the grounds of industry. Successful claims have been made in automotive, construction, technology, engineering, manufacturing and even food and drink & printing/packaging industries – processes such as developing hardware & software components or designing, testing and trialling a prototype, introduction of new or alternative materials, or even developing a new type of pet food (!) are all examples of where companies have made successful claims & reduced their tax bills as a result.
What It Could Be Worth?
For SMEs, from 1 April 2015, the R&D tax claim enhancement (the enhanced deduction) was increased to 230% of the qualifying R&D expenditure incurred.
Therefore, where an SME incurs expenditure of £100,000 on qualifying R&D, it can deduct £230,000 when calculating its taxable profit, or loss, for corporation tax purposes. As the £100,000 would already be accounted for in its accounts, the balance of £130,000 would be an additional deduction from its taxable profit and the corporation tax saving would be £26,000 (at a corporation tax rate of 20%), so an additional saving of £16000, and the equivalent of the company receiving 26p from HMRC for every £1 they spent on R&D activities.
A profitable SME
For a profitable SME an R&D claim would reduce its profits chargeable to corporation tax for the period, by the amount of the additional deduction.
Where the additional R&D deduction is greater than the SME’s profit for the relevant accounting period then this will create a loss for corporation tax purposes. The SME will then have to decide whether to carry back the loss to the previous accounting period (assuming there is a taxable profit), to carry the loss forward and offset against future profits (as and when they arise) and/or to surrender the loss (fully or partially) to HMRC in return for a payable R&D tax credit.
The total R&D tax credit claim benefit to an SME for a particular accounting period could therefore be a total of the corporation tax relief in the year of the claim, the corporation tax relief from the previous accounting period (due to the loss carry back) and the payable R&D tax credit.
A loss making SME
As mentioned above, where an SME makes a loss for corporation tax purposes, the total amount of the loss arising after the R&D claim can be carried back to the previous accounting period (assuming there is a taxable profit), can be carried forward to be offset against future profits (as and when they arise) and/or be surrendered to HMRC in return for an R&D cash credit to bolster cash flow.
Where the R&D enhanced losses are carried back or carried forward the tax relief is based on the SME’s corporation tax rate for that year, so the tax relief calculation is similar to that of a profitable SME (as above). However, if the company elects to surrender its R&D enhanced loss to HM Revenue & Customs, in return for a cash credit, then the calculation is different. In this situation the cash credit can now be worth as much as 33.35p for each £1 of the eligible R&D expenditure. This rate was 32.63p for each £1 spent between 1 April 2014 and 31 March 2015.
Don’t Miss Out…
Many business owners are either unaware of the potential benefits of R&D tax credits, mistakenly think they are difficult to qualify for, underestimate the potential benefits or simply don’t think the scheme will apply to their business.
These assumptions are often incorrect and this is where K A Farr & Co, accountants in Southport can provide R&D tax help, with our proven track record of successfully reclaiming tax for our clients. Call us to find out if your company could qualify on 01704 211434 or email firstname.lastname@example.org