Are you entitled to Research and Development Tax Relief?
R&D Tax Relief is an appealing way for innovative companies that are eligible, to access substantial cashflow benefits. The relief can be received as a reduction to Corporation Tax or as a cash payment.
In addition, you can submit retrospective claims for the previous two years.
Companies eligible for R&D Tax Credits are those making appreciable improvements to science and technology, which can include product development, process improvement, and advances in software development.
Is my project eligible for R&D Tax Relief?
This is a question we often get asked. HMRC guidance suggests that you ask yourself the following questions:
- Does your company have a project?
- Are you seeking an advance in a field of science or technology?
- Does the advance extend the overall knowledge or capability in the field of science or technology and not just the business’s own state of knowledge or capability?
- Does the project involve uncertainty that competent professionals can’t readily resolve and where solutions aren’t common knowledge?
If you can answer yes to the above, then your project may be eligible for R&D Tax Relief.
There are two R&D tax credit schemes, one for SMEs and one for large companies. The R&D tax credit scheme for SMEs has a more substantial rate of tax credit – up to 33p for every £1 spent on R&D. The rate of scheme for larger companies in relation to the research and development expenditure credit (RDEC) – is in the region of 10p for every £1 spent on R&D.
Funding research and development
Considering the questions above, if you do have a project then timing of grant funding and R&D tax relief is important. Grants tend to be up-front funding for which you will have to pitch for, whereas R&D tax credits are a retrospective tax incentive that can be claimed after the project has begun.
When looking at claiming funding and R&D tax credits together, planning is crucial as complications can arise from EU rules in relation to state aid and competition. If you claim grant funding for your project, this may prohibit you from claiming R&D Tax Relief for the project under the state aid rules, so this is definitely something you should discuss with a professional before deciding on your funding route.
Claiming grant funding can seriously impact on a company’s ability to claim R&D Tax Relief. Talk to us for help in navigating any grant application to ensure it does not necessarily prevent or limit a future R & D tax credit claim. We can also offer strategic business advice on how to adapt your processes to make sure you are eligible for as much innovation funding as possible.
Example of what R&D tax relief could be worth
| Profit Making SME* |
|---|
| £100,000 R & D spend |
| X 130% enhancement rate |
| = £130,000 x 19% Corporation Tax Rate |
| = £24,700 / 100,000 = 24.7% |
*On top of normal tax relief on costs
| Loss Making SME |
|---|
| £100,000 R & D spend |
| X 130% enhancement rate |
| = £130,000 + £100,000 |
| = £230,000 |
| X 14.5% surrender rate |
| = £33,500 / 100,000 = 33.3% |
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