What is Research & Development (R&D) tax relief?

7th December 2020

R&D tax relief is a corporation tax relief that may reduce a company’s tax bill or result in a payable tax credit. The amount of relief available varies according to whether the company qualifies for the more lucrative Small or Medium- sized Enterprise (SME) scheme or the large company scheme (RDEC).

Who may claim the relief?

This tax relief is only available to companies only. Partnerships and sole traders are unable to obtain this relief.

The idea that R&D tax relief is only applicable to those companies performing laboratory research work or those working in ‘white coats’ is a common misconception. Instead, it can apply to companies in a wide range of different industries working in a variety of business sectors. For instance, if you are developing software/websites, working as a an architect on a new building design or involved in new agricultural production techniques you may be able to make a claim. The best thing to do is ask the question.

Furthermore, if you are an SME and you undertake sub-contracting R&D work for a large company there is the possibility of making a claim even though you are being paid to undertake the work. Such a claim made would be made through the RDEC scheme.

If you are not already claiming R&D tax relief, perhaps you should be. A claim may be made irrespective of the level expenditure incurred relating to the R&D work undertaken (i.e. there is no minimum spend requirement).

What is the tax impact of making a claim for an SME?

If you are a SME and qualify for this scheme, then all eligible expenditure will qualify for a 130% uplift.

So for example, if a company incurred £10,000 of qualifying R&D expenditure, it would be entitled to an additional corporation tax deduction of £13,000. This results in an additional corporation tax saving of £2,470 (£13,000 X 19%). Or suppose a company incurred £50,000 of qualifying expenditure, then an additional deduction of £65,000 would be available. This results in an additional corporation tax saving of £12,350 (£65,000 X 19%)

What if I am loss making SME?

Companies who are undertaking R&D work (especially in the early stages) may not see the benefit of any additional corporation tax deduction as they have no profits to offset this against. Therefore, rather than carry the losses forward against future profits, they may chose instead to claim the R&D tax credit.

The tax credit is 14.5% of the lower of two totals:

  • The company’s taxable loss.
  • The R&D expenditure incurred by a company, plus the 130% uplift.

For example suppose a company had a taxable loss before accounting for any R&D expenditure and it incurred £50,000 of qualifying expenditure. It would be eligible for an uplift of £65,000 (see above), meaning that £115,000 would be available for the tax credit.

If the tax credit is claimed the company receives a cash payment of £16,675.

The alternative would be to not claim the credit and carry the £115,000 forward against any future profits where relief is given at 19%. This gives a tax saving of £21,850.

The R&D tax credit does result in less tax relief being awarded but unlike carrying the loss forward companies are able to obtain instant relief, which may prove to be a valuable source of funding.

It is important to note that for accounting periods starting on or after 1 April 2021, the tax credit will be capped at three times the company’s PAYE and NIC bill for the corresponding period, so you do need to have a payroll of employees to qualify.

Making a claim under RDEC

If you are making a claim under the large company scheme (RDEC), the effective cash for benefit is 10.53% on qualifying expenditure.

If a company is loss making it may also claim this amount as a tax credit. However, the amount that mat be claimed is limited to the company’s PAYE & NIC bill for the period.

How can we help?

We have seen the R&D scheme provide valuable benefits to our client. And if you think you are not spending any money on R&D, think again

There are quite a few potential pitfalls. The tax legislation around R&D claims is highly complex, as is the case law. There are many grey areas to confuse the inexperienced and HMRC’s requirements are also constantly changing. Therefore, achieving successful R&D tax relief claims that maximise cash returned to the business depends on having a deep and current understanding not only of the legislation,  but the way that HMRC applies it.

We have worked successfully with many businesses in Devon, the South West and beyond, helping to identify areas where they are eligible to make a claim and managing the complex application process on their behalf. We liaise with HMRC to ensure that clients receive the correct tax relief due to them, promptly. Leaving it to us makes the whole process hassle free and lets you get on with growing your business.  We can also make an application for advance assurance. If approved by HMRC it will allow the first three accountancy periods of claiming R&D relief without raising further enquiries.

What if I believe I might have a qualifying project?

Speak to us. We have  a dedicated team with the expertise and specialist skills required  to help with any R&D tax relief claim. After an initial, free, one-hour open discussion we can generally assess within reason the merit of any potential claim or refund.

We have successfully claimed relief for companies in a whole range of industries ranging from those involved in agricultural production, software development and architects/the construction industry.

Get in touch with our R&D experts for advice.

Related Contacts

Jon Westley

Jon Westley Partner

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Simon Lewis

Simon Lewis Partner

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