The world of R&D Tax Credits can be confusing and daunting, with ‘tax credits’ developing somewhat negative connotations in recent years, it is understandable why many business owners shy away from the mention of the phrase. The name itself can be misleading as in essence, R&D tax credits are a financial incentive provided by the government that encourages businesses to innovate their products and practices. Moreover, when people think of R&D they imagine a laboratory with employees wearing white lab coats which puts many businesses off the idea that their activities will qualify for the incentive. Crucially, there are many different sectors and types of companies that carry out eligible R&D activities because the scope for qualifying projects is huge. R&D is loosely defined as striving to improve products, services, or processes OR creating new ones, which millions of businesses do every day. The combination of a lack of understanding and information about the incentive and an attitude of scepticism as the scheme seems ‘too good to be true,’ means 75% of eligible SMEs are not utilising the incentive, meaning thousands of businesses are missing out on millions of pounds that they are entitled to.
The key draw of using the R&D incentive is that there is nothing to pay back and claimants can receive their cash award in as little as 4 weeks. Furthermore, unlike loans and grants, the claim money can be spent on whatever projects the claimant feels will most benefit from investment, allowing business owners to choose which areas of their company to grow.
How claims are calculated:
Qualifying R&D expenditure is enhanced by 130% which is then used within the R&D tax calculation to create a financial award. Both profit- and loss-making companies are eligible, and the scheme is designed to be equally generous in both cases. Claims can be backdated up to 2 financial years and successful claims can be used to decrease corporation tax paid.
Eligible R&D activities:
- Overcoming technical challenges
- Creating and testing prototypes
- Streamlining processes
- Trialing new materials
- Developing bespoke software
- Trial and error
- Industry firsts
Costs you can claim for:
R&D claims are constructed from overhead costs rather than capital expenditure. These costs are then enhanced to make up the claim. They include:
- Staff costs
- Materials consumed
- Utility costs
- Some software costs
The two branches of the scheme: SME vs. RDEC:
There are two different branches of the scheme your company can qualify for depending on your gross assets, staff numbers, and turnover.
- SME (Small-Medium Enterprise)- companies must employ no more than 500 members of staff. They must also have a turnover of under €100m or gross assets of under €86m.
- Research and Development Expenditure Credit (RDEC)- companies must have a staff headcount of at least 500. They must also have a turnover of €100m or more and at least €86m in gross assets.
If you believe your company could qualify for the incentive, head to the calculator page on our website which will give you a rough figure of the size of your potential claim. At randd, we offer a free eligibility consultation so please contact the office on 01332 477 070 if you think you can qualify.