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The R&D Tax Credits entitlement is all about rewarding innovation. But how much can be claimed and what the process will be, depends on which branch of the scheme you'd be looking to claim under - your options being either the SME scheme, or the Research and Development Expenditure Credit (RDEC).
Both strands of the scheme work in a similar way, but that is pretty much where the similarities end.
RDEC was launched back in 2016 as a replacement to the previous Large Companies R&D scheme. Under the old regime, a 130% Corporation Tax relief rate could be claimed on a UK company’s eligible R&D costs. So, for example, if a company spent £1,000 on an eligible project, then the profits it needed to be taxed on would be reduced by an extra £300 over what was actually spent. For companies with an allowable trading loss, this loss could be increased by 30% of eligible R&D costs.
The new RDEC works slightly differently. Now a company can instead claim a credit worth 13% of everything it has spent on applicable R&D work. Simply put, profitable companies pay less tax, and loss-making organisations can receive cash payments instead.
A large company in this context will typically have:
If your company is linked to or partnered with any other companies, you will need to include any figures related to this when making your RDEC claim.
Usually if your company doesn’t meet the above criterial you’ll need to claim under the SME branch of the scheme. However there are certain exceptions to this rule which we will be happy to advise you on.
An RDEC claim is worth up to 11 pence per every £1 of eligible R&D expenditure. If successful, the benefit is paid out in the form of a credit representing 13% of the expenditure. The credit is taxable, so in effect the cash benefit is 11% net.
Yes, it has. The RDEC rate used to be 12%, but from the 1st April 2020 the government has increased it to 13%. With claims from larger companies often running into the hundreds of thousands, this extra 1% is likely to make a substantial difference.
Obviously there’s the resultant extra cash. But on top of this, any tax credit claimed via the RDEC scheme is “above-the-line” in your profit and loss account. This in turn can have a positive impact on your pre-tax profit. This clearer view may then influence your decision-making, as you can monitor your performance against your profit before tax. Not only that, but the extra visibility of “above-the-line” treatment (which incidentally isn’t the case with the SME scheme) also helps stakeholders see what kind of returns the R&D work is bringing about. By having a direct impact on the expenses for company departments that are actually completing the research and development, further company investment in R&D is encouraged.
RDEC tax relief claims are calculated from when work begins on resolving the technological or scientific uncertainty. It’s at this time that the relevant challenges will have been determined, and that there’s no existing solution or professional in the field that can find one easily.
R&D Tax Credits can be claimed until a working prototype has been developed that resolves the problem, or until the project is wound down.
There’s a large number of eligible types of expenditure that can be claimed under an R&D Tax Credits claim. This isn’t an exhaustive list by any means, but as a guide they include:
It’s important to also understand how RDEC relates to the SME scheme for R&D Tax Credits, as there are times when your company may chop and change between the two. This might be if you suddenly take on large numbers of staff for example, or if your turnover drastically increases.
Our team recently put together a guide on HMRC’S SME R&D Tax Credits scheme which goes into more detail.
Note that if and when the SME/RDEC border is crossed, you don’t necessarily need to alter the status of your R&D claim straight away. Generally, it’s only if your company meets a scheme’s criteria for 2 years in a row that the switch will need to be made. However, if your company is bought out by - or merges with - a larger entity, then the switch to RDEC will be immediate. In fact, if this was to occur, you’ll actually be a considered a large company for the entire period, not just from when the acquisition or collaboration occurred.
Don’t forget that even if your business seems to fit the criteria for the SME scheme, there times when - regardless of size and turnover - you’ll actually need to claim under RDEC. This would be if you’ve previously received state aid for example.
Feeling a little bombarded? As you can probably tell, R&D Tax Credits is a complex area of tax that’s not for the faint hearted. Even if you’ve claimed before, it’s not always obvious which branch of the scheme applies this time and what costs should be included. The minutiae of putting together a successful claim that stands up to HMRC interrogation is also a challenge. It’s extremely resource-intensive and time consuming, and mistakes are commonplace.
At Myriad Associates, we have many years’ extensive experience in assisting companies from all over the UK with their R&D Tax Credit claims. Contact us today on 0207 118 6045 for help, or drop us a message with your details.