Research and Development (R&D) Tax Credits have become a valuable source of funding for companies and can aid in accelerating business growth. This blog encompasses everything you need to know about the scheme to help you identify if you are missing out on claiming expenditure spent on research and development.
R&D tax credits are an incentive designed by the Government to reward innovative companies who spend money on developing new products, processes, or services; or enhancing existing ones. R&D tax credits can help your company grow without diluting your equity.
For the purpose of Research and Development Tax Relief HMRC defines an SME as a business with not more than 500 employees and an annual turnover not exceeding £100 million. However, the rest of the UK government does not use this definition.
For the purposes of collecting statistics, the Department for Business defines SMEs as companies with less than 250 employees.
For accounting purposes, Companies House defines a small business as employing less than 50 people and a turnover under £6.5 million and a medium business as less than 250 employees and a turnover under £25.9 million.
Costs that qualify for R&D Tax Credits should be revenue expenditure i.e elements that operate the day to day running of the business such as:
But don’t forget the expenditure still needs to be spent on developing new products, processes or services; or enhancing existing ones.
Research and Development is a broad scope and can apply to any sector. If companies are spending money on their innovation, they can develop an R&D tax credits claim to receive a cash payment or Corporation Tax Reduction of up to 33% of their last two completed accounting periods.
HMRC aims to make 95% of payments within 28 days for SMEs claiming R&D tax credits. However, this does not include the time it takes for the money to arrive in your bank account which can be up to 10 days once the claim is approved.
If you are a large company your claim under the Research and Development Expenditure Credit (RDEC) scheme may take longer to be received due to the scheme’s greater complexity and HMRC’s checks.
A common misconception is that innovation grants and R&D tax credits are mutually exclusive. However, this is not the case, but their relationship can be complicated.
RDEC is often mislabelled as a scheme that is solely accessible to large companies. However, for SMEs that have received state aid in the form of grant funding, this is an important additional source of non-dilutive funding.
One of the benefits of RDEC claims is that they can be accounted for above-the-line in your income statement (also known as your profit-and-loss account), providing a positive impact on visible profitability in your accounts. This visibility has a positive impact on R&D investment decisions.
Despite common misconceptions, SMEs awarded grant funding by the UK Government can continue to utilise both the SME R&D tax credits scheme and RDEC to claim tax relief on eligible R&D costs incurred.
Additionally, if you have been subcontracted to do R&D by a large company you can claim this via the RDEC scheme also. However, if you are working for another SME they will claim for these activities, therefore before claiming it is important to assess the nature of your subcontracting agreement and who ‘owns’ the R&D activity and is therefore entitled to claim.
On the 1st of April, the Government’s Finance Bill 2021 sets out to make some changes to the R&D tax credits scheme to target perceived fraudulent claims using structures set up in the UK to claim a repayable credit even though no R&D work was actually carried out in the UK.
In order to prevent this abuse, the government has introduced a cap on the amount of the payable R&D tax credits that a qualifying loss-making company can claim.
The cap will limit the payable R&D tax credits to three times the total PAYE and NIC liability of the company for the year plus £20,000.
A company making a claim for a payable R&D tax credit of less than £20,000 will not be impacted by the cap.
The Government has also introduced 2 tests that companies will need to pass to not have their claim capped. These tests require that a company’s employees are creating, preparing to create, or actively managing Intellectual Property (IP) arising from the R&D project and that its expenditure on work subcontracted to, or agency workers provided by, a related party is less than 15% of its overall R&D expenditure.
A great deal of genuine SME claims will be affected by the introduction of the new cap. Companies that are likely to be impacted include:
For a detailed analysis on the distribution of R&D Tax Credits funding, download Granted Consultancy’s free 2020 Grant Report.
Ensuring that R&D Tax Credits is applied correctly means that you will not miss out on potentially significant income. With Granted Consultancy’s expert advice, we can help you navigate, carefully plan and optimise your future position.
Get in touch with our team today for an estimate of how much you could claim.