Who is eligible?
Types of R&D tax incentive
The amount of money you can get back in your claim depends on the scheme you qualify for. We have outlined below the two main schemes, the differences being the size of your business, the amount of Corporation Tax that your company is paying and whether your company is profit or loss making. Irrespective of the nature of your business there is benefit in making a R&D claim as you can receive a return between up to 33.35%, for an SME (up to 21.5% of R&D costs incurred from 1 April 2023).
R&D Intensive SMEs’
From 1 April 2023 a new credit rate will be available to loss-making companies whose R&D expenditure constitutes at least 40% of total expenditure or 30% for accounting periods beginning after 1 April 2024. Qualifying companies will be able to claim a payable tax credit rate of 14.5% for qualifying expenditure instead of the new credit rate of 10% applying to other SMEs.
SME R&D expenditure enhancement and tax credit
If your company employs fewer than 500 employees and has a turnover not exceeding €100 (£86) million or a balance sheet total under €86 (£74) million, you should look to qualify for the SME R&D tax credit scheme. With this scheme companies could offset up to 33.35% (21.5% from 1 April 2023) of R&D costs (to reduce their Corporation Tax and in some cases, companies may receive this as a cash credit from HMRC. It is important to note that the relief is given via an adjustment to the tax account and not the P&L account and so, strengthening the balance sheet.
What could R&D Tax Credits be worth to a Small or Medium Enterprise?
The R&D tax relief is designed to enable a profitable SME to reduce the amount of Corporation Tax it pays for the period by applying an enhanced deduction of 130% (230% deduction in total). This results in a tax benefit of 24.7% based on a CT rate of 19% (130% x 19% = 24.7%). From 1 April 2023 the enhanced deduction is 86% (186% in total) this results in a tax benefit of 21.5% based on a CT rate of 25% (86% x 25% = 21.5%).
NB. Increase in CT rate from 1 April 2023 up to 25% means profits between £50k-£250k resulting in a tapered (marginal relief) tax benefit between 16.34% and 21.5%.
R&D Tax Credits for
loss-making SMEs’
Where the enhanced R&D deduction is greater than the SMEs taxable profit for the relevant accounting period then the notional deficit maybe treating to achieve a tax benefit, as follows: -
Carry back to previous accounting period of 12 months or last 36 months for accounting periods ended between 1 April 2020 and 31 March 2022 (Covid-19 temporary measure)
Carry forward for offset against future profits
Surrender (fully or partially) to HMRC in return for a payable R&D tax credit
The SME may surrender the lower of the enhanced R&D relief or deficit for the period. The rate of R&D tax credit (cash payable) is currently 14.5% (10% from 1 April 2023) of the surrendered sum. As the total enhanced R&D relief is 230% (186% from 1 April 2023) a cash credit can be worth as much as 33.35p (18.60% from 1 April 2023) for each £1 of eligible R&D expenditure.
Are you an accountant add want to add R&D Tax Credits to your expertise?
Research and Development Expenditure Credit (RDEC)
For the most part, the RDEC scheme is designed for larger companies, although there are circumstances where the scheme will be applicable to SMEs. If you have more than 500 employees and, either more than €100 (£86) million turnover or €86 (£74) million balance sheet total then you’ll need to claim through the RDEC scheme. From 1st April 2020, companies receive 13% (20% from 1 April 2023) credit on their qualifying R&D expenditure. However, the credit is subject to Corporation Tax currently at up to 25%, known as ‘above the line’ so, the net credit is worth approximately 15p back for every £1 spent.
Merged Scheme
For Accounting periods commencing 1 April 2024 the SME and RDEC schemes have been merged into one combined scheme based on RDEC with the gross (above the line) credit rate increasing to 20%. NB SME scheme for R&D intensive companies remaining.
What R&D expenditure
can be claimed?
Your company can claim relief for costs that have been expensed through the Profit & Loss account and in certain circumstances you can also claim capitalised expenditure (providing that the assets purchased have been classified as Intangible Assets). The main areas that can be claimed are:-
staff costs (gross pay, employer’s NI and employer’s pension contributions)
agency workers (externally provided workers)
subcontractors/freelancers
software licence costs
consumable items (heat, light and power and materials and equipment used or transformed by the R&D process) and,
certain data and cloud computing costs
In general, the qualifying costs are the same for both the SME and RDEC schemes. However, in the RDEC scheme companies cannot claim for subcontracted R&D, unless the subcontractors are “an individual, a partnership (each member of which is an individual), or qualifying body. New rules apply for Grant & Subsidised and sub-contracted under the merged scheme.