A company that is undertaking innovative research and development work may be eligible to claim R&D Tax Credit under one of two schemes
Research and Development (R&D) tax credit is a valuable government tax initiative that is designed to encourage and reward companies investing in R&D projects that will help further knowledge in a given field. There are two types of tax credit schemes that a company can claim, either the SME R&D relief or RDEC.
This article will explore the key features of the two schemes, how to find out whether you qualify and what type of costs are eligible. It further describes why companies should utilise these tax incentives and how Novel can help your company claim for the R&D tax credit if you are an SME.
When does R&D take place?
To claim benefits on an R&D project, HMRC has a specific criterion that needs to be met:
- For tax purposes, R&D takes place when a project seeks to achieve an advance in science or technology.
- The solution that the R&D project aims to find should not be easily worked out by a competent professional in the field. This means that there really needs to be an aspect of uncertainty.
To learn more and get examples of what type of projects qualify in different fields, we suggest you visit our industries tab.
Types of R&D Relief
Depending on the size of your company and if the project has been subcontracted or not, you may qualify for either one of the two R&D reliefs.
Small and medium-sized enterprises (SME) R&D Relief
- Must be a limited company based in the UK that has been trading for at least a year.
- Less than 500 staff
- A turnover of under £85 million a year.
Research and Development Expenditure Credit (RDEC)
- Companies that do not meet the above SME criteria are classified as ‘large companies’.
- Although this scheme is created for large companies, it can be claimed by SMEs that have been subcontracted to do R&D work by a large company.
- In circumstances where an SME has received some source of grant funding or subsidy, it cannot claim under the SME R&D scheme and needs to apply through the RDEC scheme.
What are the benefits of making an R&D Tax Credit claim?
From experience and the statistics published by the government, we know that many businesses miss out on claiming the R&D tax credit. The two main reasons why companies miss out is because some don’t know about the scheme, and many don’t think they qualify.
However, with a chance to get a tax credit of up to 230% and the ability to bring a claim two years from the start of a qualifying R&D project, this is something your company shouldn’t miss!
The benefit comes in the form of a CT liability reduction and/or a direct payout from HMRC. There are two ways of getting a payout. One is by a refund, this is used if the CT liability has already been paid for the year in question. Any refund awarded then can be used to offset against other imminent tax bills such as PAYE.
The other is by surrendering losses for a cash credit. This type of payout is, in fact, the most generous as the scheme is designed to help loss-making companies that are in the product development phase with minimal to no sales.
The main benefits of a successful claim are:
- Rebate on Corporate Tax
- Payable Tax Credit
SME R&D Relief Benefits
Profitable SMEs can subtract an extra 130% of their eligible R&D expenditure from their taxable profit, including the normal 100%, making the total available rate of relief 230%, with cashback available to loss-making SMEs of 33.35% on qualifying expenditure. This means that tax-paying companies can claim £26 back for every £100 spend on R&D, while loss-making companies can claim £33.35.
Research and Development Expenditure Credit (RDEC) Benefits
The RDEC is a tax credit. This means, that if we take the current RDEC tax credit of 13%, which was increased in the Spring 2020 Budget from 12% and offset it with the current tax rate of 19%, the case benefit increases to 10.53% from 9.72%.
If the business is not paying tax because its loss-making, or it is using up losses brought forward, a cash credit of 10.53p per £1 spend is available. However, this cash credit is limited to the amount of PAYE and NIC paid by the company in a given period.
Grants, subsidies and RDEC
Government grants and subsidies are not the same as an R&D tax credit, but it is a type of innovation funding by the government. There is a common misconception that if an SME received grant funding, it cannot claim R&D tax benefits. However, that is not exactly correct. SMEs that received a grant tend to be restricted from claiming under the traditional SME R&D scheme, which is more generous, but they can, nonetheless, claim under the RDEC. The main difference is the rate of relief that an SME can benefit from.
Depending on the way a grant is structured, it will have an impact on what type of R&D tax credit benefits you can claim, so we advise having an R&D specialist look into that for you before you consider that you are not qualified. There are also some grants that are not classified as state aid, such as de minimis State Aid, which means an SME would be eligible to claim under the SME R&D tax credit scheme for any extra costs not subsidised by the grant. With the chance to save up to £33 back for every £100 spend on R&D, it’s worth finding out more.
SME R&D Tax Credit Claim
- Staffing costs, including wages, class 1 NIC and pension contributions.
- Consumable or transformable materials, such as equipment, utilities and more.
- Subcontracted R&D staff.
- Externally provided workers.
To learn more about qualifying costs for SME R&D tax credit, click here.
- Staff costs, including wages, class 1 NIC and pension contribution.
- You can claim 65% of the relevant payment made to an external agency if they provide staff for the project.
- Consumables or transformable materials.
- Payments to qualifying bodies, such as a university, charity or scientific research organisation, may qualify.
Not qualifying costs
- Production and/or distribution of goods and services
- Capital expenditure
- Cost of land
- Cost of patents and trademarks
What is the difference between the SME R&D and the RDEC tax credit scheme?
In summary, the SME R&D tax credit scheme and the RDEC scheme are both UK government R&D tax credit initiatives that address different types of companies. What qualifies as R&D project is the same for both schemes, the main differences are in terms of their eligibility criteria, the amount of tax credit a company receives and what are the qualifying costs.
|230% rate enhanced deduction||13% of expenditure – CT rate (April onwards) |
12% of Expenditure – CT rate (Jan 2018 to April 2020)
|Can claim tax credit of the lesser of either the surrendered loss or the enhanced R&D expenditure at 14.5%||Can claim credit under certain conditions|
|Can claim subcontractor expenses||Only claim in house, unless subcontracted to qualifying bodies, individuals, or partnerships of individuals|
|Can’t claim contributions to independent research||Can claim contributions to independent research|
|Claim can be reduced if the R&D project is subsidised or a grant is received in respect of it.||No reduction for grant or subsidy|
How Novel can help
We believe governments all over the world should support innovation. Currently, in the UK the support is available through the R&D tax scheme but it’s difficult to get hold of, so we help. We knew that the best way to get more people to claim R&D tax relief is to develop an automated solution that will guide and educate businesses about the relief, and help them correctly claim.
Novel was created to help businesses claim under the SME R&D scheme and at the moment doesn’t support RDEC claims. However, we are planning on allowing for RDEC claims through our platform so stay tuned. Subscribe to our newsletter to be the first to know.
You can try Novel today and get the first 3 months FREE.