What is R&D tax credits?

Research and Development (R&D) Tax Credits are a government incentive designed to reward UK companies who are investing in Innovation, by developing ‘new’ or ‘improved’ products or processes. They were first introduced by the Labour Government in 2000. We can see from recently published HMRC statistics, that in the year ending March 2020, it is estimated that 85,900 claims were completed, estimated to be worth more than £7 Billion.  Excluding our smallest and largest clients the typical claim size is in excess of £30,000 tax benefit to our client.

The tax credit can either be used to offset a tax bill or taken as cash depending on whether the business is currently profitable. SME’s can claim up to 33% off the money they have invested in eligible R&D and Large Companies can claim up to 12%. The regulations allow for a claim to be submitted for the current financial year, plus two previous financial years. These claims can be made at any stage of the financial year, not just at year end.

R&D tax credits can be claimed by a variety of different companies in an array of different sectors. These include, but are not limited to; Software, Engineering, Vaping, Manufacturing, Construction , Agriculture Chemicals, Telecommunications, Health and Wellbeing, Furniture, Food and drink.

SME vs RDEC

To claim R&D Tax Credits under the SME scheme, companies must:

• Employ no more than 500 members of staff
• Have a turnover of under 100 million euros
• Have a balance sheet of less than 86 million euros

Any company that exceeds these limits will only be able to claim the Research & Development Expenditure Credit (RDEC) scheme.

The Key headlines for a viable R&D claim

• The client must demonstrate to HMRC that the company has a product or service that is an appreciable improvement from what is currently out there on the market.
• For this appreciable improvement, the client must identify scientific or technological uncertainty within the product that is not easily resolvable by a competent professional in the industry.

Eligible expenditure for R&D Tax Credits

• R&D claims are typically driven by salaries as well as materials wasted within the process of developing an R&D product.
• Salaries will include anyone who has directly or indirectly supported an R&D project. This included anything from emails to set up R&D meetings all the way to developing the product. (For salaries we can only claim for PAYE and cannot include dividends)
• All wasted material costs used up during research and testing can also be included, as well as a proportion of general overheads.

Quick example

Assuming that we have an allowable expenditure figure of £100k, the R&D scheme allows us to uplift this cost by 130% giving us a total of £130k to utilise. With this £130k we have 2 main options:

1. Used against profits to reduce the tax liability, With the current corporation tax rate of 19% that would be £24,700 reduction in tax liability.
2. we can also surrender the amount for cash if the company is in a loss making position, but at a less beneficial rate of 14.5% giving £18,850.

Both figures do not consider our fee which is a percentage of the benefit obtained.