R&D Tax Credits work by reducing a company's tax bill by an amount equal to a percentage of its allowable R&D expenditure.
R&D Tax Credits
R&D Tax Credits were first introduced by the Government in 2000 to encourage business to invest in innovation. The principle is straightforward, but misunderstood.
The regulations allow for a claim to be submitted for the current tax year, plus two previous tax years. This means that the financial benefit in the first instance, can be significant. Claims can be made at any stage of the Financial Year.
The tax credit can either be used to offset a tax bill, or taken as cash depending on whether your business is currently profitable or not.
Does your business qualify?
The mention of 'Research and Development' puts many businesses off. Many interpret the phrase as meaning that they have to be a research company, or maintain a big R&D team. If you innovate and improve the way something works in your business, and the outcome lacked 'certainty' in the beginning, you may qualify.
The key questions you should ask yourself are:
- Are we producing new or improved products?
- Did the design and development involve some uncertainty for which the answers were not obvious?
We have the expertise to quickly understand your business and focus on whether you qualify. If in our opinion you do, we work with you to substantiate the figures, prepare a report and handle the submission and negotiation with HMRC.
Generally, the turnaround time is around 12 weeks.
How does the relief work?
There are three different R+D Tax Credit schemes, depending on the size of your business;
- Small and Medium sized Enterprises
- Large Companies scheme
- Research and Development Expenditure Credit (RDEC)
The Small and Medium sized Enterprise Scheme
Under the SME scheme, the company receives a 'super deduction' of 225% (230% from 1 April 2015) of the qualifying expenditure.
For example, if a company spends £75,000 on R&D it will receive a tax deduction of £168,750 at a tax rate of 20% this equates to an extra tax saving of £33,750
If the company is not currently paying tax, the enhanced expenditure can be surrendered for cash at a rate of 14.5% (11% prior to 1 April 2014) so in the above example, a cash payment of £24,469 could be due.
Qualifying expenditure includes staff pay (including employers NIC), a proportion of the costs of subcontractors, consumables, software purchased for R&D purposes a proportion of overheads and some prototype and test products.
The Large Company Scheme
The large company scheme is available to ANY company that does not qualify for the SME scheme. This may be due to size, you are a subcontractor, or you have received certain grants.
The scheme is similar to the SME scheme except the deduction is 130% so if the expenditure is again £75,000 the company will get an extra deduction of £22,500 which equates to tax at 24% of £5,400.
The qualifying expenditure is similar to the SME scheme except that subcontractors who could claim themselves are excluded.
There is no facilty to surrender the enhanced expenditure.
Research and Development Expenditure credit
(replaces the Large company Scheme from April 2016)
The company will be able to claim a credit of 10% of the qualifying expenditure after allowing for set offs against any corporation tax liability. The credit can be used against future tax liabilities, surrendered for cash or a combination of the two.
Qualifying expenditure is similar to the large scheme.
Our simple, seven-stage process
Our aim is to not only advise you, but to support you by taking as much of the work from you as possible. We have devised a simple 7-step process which will lead you from the first discussions with us to receiving the cash or tax benefit. Although we will be preparing the claim and dealing with HMRC, you will always be in control and we will provide you with regular updates and a timetable.
In 2010, Stephen worked with a light engineering company based in the Midlands. When he first spoke to them, they did not believe they would qualify as they 'didn't do' R&D. After a brief meeting it was discovered that they were producing innovative parts for F1 racing cars and motorbikes as well as developing equipment for the latest satellites.
The claim resulted in a substantial tax credit worth tens of thousands of pounds.