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Research and development (R&D) Tax Credits can offer a substantial - and very much welcomed - cash injection for innovative UK companies. If an organisation is carrying out R&D work, it may be able to claim R&D Tax Credits using one of two branches of the scheme: the SME (Small-Medium Enterprise) branch, and/or through the Research and Development Enhanced Credit (RDEC) scheme. Understanding the differences between the schemes is a vital first step in making your application. Here we look at the key differences between them.
Back in the year 2000, the UK government unveiled its R&D tax relief scheme to encourage innovation, growth and global competitiveness. It also conveyed the government’s understanding that innovative work could be expensive, and for many smaller businesses this may be prohibitive. The idea behind the incentive is that is that it allows a company to reclaim some of the money it has spent out on eligible research and development activities.
For tax purposes, what HMRC considers to be R&D, and what company executives may understand as R&D, could well be two different things. This is why it’s so important to work with R&D tax specialists such as ourselves when making your claim, as this can be a very annoying - and rather tricky - grey area. In a nutshell, for tax purposes HMRC considers that a company has undertaken R&D work when they are 1) looking to overcome a specific technological or scientific uncertainty, 2) making an advancement in technology or science and 3) making progress which isn’t easily achievable by a competent professional in the field.
The way R&D Tax Credits work is they serve to increase a company’s taxable losses or reduce its taxable profits. There are three main types of tax benefit that come about from a successful application for R&D Tax Credits, which are 1) a rebate of Corporation Tax, 2) a payable tax credit and 3) an enhanced deduction which companies can choose to carry forward if they wish. It’s worth noting here that claims can go back as much as two years after the R&D project has occurred.
For qualifying activities, eligible expenditure can be anything that’s been spent on staff wages, subcontractors, externally provided workers and software. It also applies to utilities and materials that were ‘transformed or consumed’ in the process, such as materials, chemicals, batteries and some types of tools.
It doesn’t even matter whether or not your R&D project was ultimately successful or not, as long as some risk was taken in making a technological or scientific advancement. Essentially, it’s the R&D activity that’s important, not the outcome of the project.
HMRC is quite clear regarding how companies should be treated:
In working out which type of relief a business is eligible for, we look at three main areas:
To claim R&D Tax Credits using the SME scheme, 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.
The SME scheme allows profitable organisations falling within these brackets to deduct an extra 130% of their eligible R&D expenditure from their taxable profit. This is over and above the standard 100% deduction which means a 230% tax deduction in total. For businesses that have made a loss, a claim can be made that’s worth up to 14.5% of the surrenderable loss.
The RDEC R&D tax relief was set up to allow for larger companies to claim for their innovative projects. RDEC stands for Research and Development Expenditure Credit and the scheme was launched in April 2016 as a replacement for its predecessor, the Large Company Scheme.
To apply under 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. RDEC allows bigger organisations to claim back 13% of their eligible R&D expenditure which often adds up to some serious money. In fact recent HMRC statistics suggest that the average RDEC claim is worth nearly £300,000.
It’s worth remembering however that SMEs can claim under RDEC in certain circumstances. Or example, if an SME cannot claim using the SME scheme because they have been subcontracted by another company then RDEC will need to be used instead. RDEC will also need to be used if the project has received notifiable state aid (grants).
Myriad Associates has been managing R&D Tax Credit claims for nearly two decades, assisting a broad range of companies up and down the country. No matter what size or sector your company is in, we can help.
We understand how important R&D Tax Credits are, both to individual companies and the wider economy as a whole. However, the government is keen to maintain the scheme’s success, and often changes or updates the rules, regulations and interpretations around it - this is where we come in.
The team at Myriad will apply a unique methodology in navigating through the complexities of the claims process. We maintain a holistic approach in order to secure the maximum amount of relief possible for your company. Due to our blend of expertise and industry experience, we know how to identify the eligible R&D work and expenditure that’s taken place. We can also help capture relevant spend in areas such as direct and indirect staffing, consumables, subcontractors, software and prototypes.
Our expert team will gather together all the information for your claim. We’ll then deal with the technical report, collate all the relevant costs and calculate the benefit owed for inclusion in your company’s tax return. We’ll even take care of any HMRC queries to make the whole process as hassle-free as possible.
Whatever stage you’re at in your claim for R&D Tax Credits, simply contact us on 0207 118 6045 or use our contact page. Whether you need full support from start to finish or simply have a quick question, we’re here to help.