Significant changes have been made to the UK’s research and development (R&D) tax relief over the last few years.
This includes the introduction of the new merged scheme in the UK, which brings together the Research and Development Expenditure Credit (RDEC) and the Small or Medium-sized Enterprise (SME) scheme.
This merged scheme aims to simplify the R&D claim system, allowing companies to apply for the credit based on their qualifying R&D costs.
It’s also important to note that different rates apply to R&D-intensive businesses. If your client’s business is R&D-intensive, it may be eligible for a higher rate of credit, so it’s worth checking the specific criteria for eligibility.
If you’re not quite sure how to calculate the R&D tax credit for your clients under this scheme, this guide breaks down the essential steps.
Guide to calculate your client’s R&D tax credit
Before calculating your R&D tax credit, ensure that your client is eligible for the relief.
Step 1 – Identify and work out the costs related to your R&D work
The first step is to identify the costs directly associated with your R&D activities. These could include:
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- Staff salaries and wages for R&D staff.
- Materials consumed or transformed during the R&D process.
- Software used for R&D projects.
- Utilities like power and water used in the R&D activities.
- Subcontractors.
- Externally Provided Workers.
If you are unsure of which costs are eligible for R&D tax relief, our specialists are happy to help you identify these costs for your clients.
Step 2 – Add all costs together
Once you’ve identified the qualifying costs, you need to add them all together. This total will form the base amount from which the credit will be calculated.
Don’t forget to double-check that each expense directly relates to the R&D activity to ensure accuracy and minimise the risk of HMRC scrutiny.
Step 3 – Multiply the credit based on your client’s tax rate.
You should be aware that the actual credit your client will receive is calculated based on a post-tax rate.
For instance, if the company’s profits are taxed at the main Corporation Tax rate of 25 per cent, the Net RDEC under the merged scheme will be 15 per cent.
Alternatively, if the company’s profits are taxed at the small companies’ rate of 19per cent, the Net RDEC will be 16.2 per cent.
Step 4 – Check the PAYE Cap
Be mindful of the PAYE cap, which generally limits the credits your client can receive to 300 per cent of the company’s total PAYE and NIC liability plus £20,000.
The expenditure credit amount you claim in an accounting period cannot exceed this cap unless the company are exempt from the PAYE cap.
Example calculation
Let’s walk through an example to demonstrate the process:
ABC Ltd. is a small UK-based software development company that is involved in improving its software platform through research and development. (The company are taxed at the small companies rate of 19 per cent.)
The company has spent the following directly on R&D activities during the year:
- Staff salaries (R&D employees) = £120,000
- Subcontractor and EPW costs = 30,000
- Materials (electrical components) = £15,000
- Software (computers, servers, and software tools) = £25,000
- Utilities (electricity) = £10,000
Total R&D costs: £120,000 + £30,000 + £15,000 + £25,000 + £10,000 = £200,000
Post-tax adjusted credit: 16.2 per cent of £200,000 = £32,400
The full credit amount (£32,400) can be claimed as long as ABC Ltd.’s PAYE and NIC liabilities meet the PAYE cap rules. However, if their liabilities are lower than this figure, the amount they can claim immediately may be reduced.
Need help calculating R&D costs?
Find out how much you could claim back for your client using our calculator.
Alternatively, get in touch with our team, and we will offer tailored guidance to help you and your client draft successful R&D tax claims.
