Are you making the most of R&D?
R&D tax reliefs: the benefits
The government actively encourages companies to carry out R&D in order to help grow their firm and increase profitability. A wide range of tax incentives exist, which are designed to encourage investment in R&D. Different types of incentives are available, depending on the size of the company. These include an increased deduction for R&D spending, alongside a payable R&D tax credit for those companies not yet in profit.
The government has stated that it is ‘committed to improving access to R&D’ for small and medium-sized enterprises (SMEs). Below, we outline how companies can claim R&D tax reliefs.
Claiming R&D tax reliefs
SMEs are permitted to claim R&D tax relief if they have fewer than 500 members of staff and a turnover of under €100 million, or a balance sheet total of less than €86 million. The relief permits SMEs to deduct an additional 130% of qualifying costs from their yearly profit. This is in addition to the normal 100% deduction, giving a total deduction of 230%.
A company may be able to surrender losses for cash repayments in instances where the R&D tax claim creates a tax loss. Currently, this is calculated at 14.5%.
In order to make the most of R&D tax relief, a company must have incurred expenditure on qualifying R&D projects that are related to its trade. Projects must be innovative and should assess and attempt to resolve scientific or technological issues.
Qualifying expenditure falls into different categories. These include staffing costs; software costs; expenditure on consumables or transformable materials; costs of work done by subcontractors; and costs of clinical trial volunteers.
Using the Research and Development Expenditure Credit (RDEC) scheme
The RDEC scheme is a replacement for the large company scheme, but can also be used by SMEs that have received a grant or a subsidy for their R&D project or are subcontracted to do R&D work by a large company. The credit is taxable, and is calculated at 12% of a company’s qualifying R&D expenditure incurred. This credit may be used to discharge the corporation tax liability, depending on whether the company makes a profit or a loss. It could also result in a cash payment. Where no corporation tax is due, the amount can be repaid net of tax or used to settle other debts.