Understanding how R&D tax relief works

R&D tax relief explained

If you find tax complicated and confusing, you’d be forgiven by many of your peers. Tax – and in particular, tax that relates to research and development – is a notoriously tricky subject, which leaves many chasing their tails. In fact, as many as 90 percent of organisations fail to claim R&D tax relief, either because they’re unaware of its existence, or because making a claim is, quite frankly, a hassle. Here, we go through the basics and reveal where you can get help.

What are R&D tax credits?

Introduced in 2000 to encourage UK businesses to innovate, R&D tax relief can be used to reduce your corporation tax bill. Depending on the size of your business and its financial status, a claim could result in the cash injection you need to keep things running.

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There are two schemes through which tax credits can be claimed. The SME scheme is for businesses who employ under 500 people and have an annual turnover of under €100 million, while the RDEC scheme is for those that exceed these figures. The relief available to you depends on which scheme your organisation falls under.

What is the remuneration?

The SME scheme is the more generous of the two, and offers a potential reduction in your company’s taxable profits by £130 for every £100 spent, in addition to the expense itself. Loss-making businesses and those whose projects were not successful can claim too, since it is the effort that is rewarded rather than the outcome.

For companies that fall under the RDEC scheme, the credit equates to 12% of R&D expenditure, less Corporation Tax. This means that for every £1 spent on R&D activity, the equivalent of 10p is rewarded. The RDEC scheme differs from the SME scheme in that any claims made appear above the line. That means they appear on any income statement or profit-and-loss account and therefore have a positive impact on visible profitability.

What are the requirements?

Of course, certain criteria have to be met in order for organisations to qualify for R&D tax credits. The government has made these criteria fairly vague with good reason – the aim is to ensure as many businesses as possible in a range of sectors can benefit from the rewards.

As such, the terms are broadly that R&D activity must seek to resolve a scientific or technological uncertainty, and that this uncertainty must not be easily resolvable by another professional in the field. In addition, the nature of the work must be such that any results or benefits could be passed onto the wider industry.

Qualifying expenditure may include such costs as staff salaries, materials, certain software licences, and utilities. A percentage of subcontractor costs can also be claimed for.

Who can help

Believe it or not, there are specialists out there who deal specifically with R&D tax claims. Professionals such as R&D Tax Solutions in Manchester are worth contacting, as they have years of experience in processing successful claims. For your best chance to reap the rewards you are due, speak to a tax specialist today.

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