Working out your research and development (R&D) expenditure can bring up a few questions. What counts as eligible? How much can I claim? How do I calculate it all?
Also, the amount you can claim is heavily dependent on the outcome of the project and the size of your company.
To avoid the risk of overcomplicating things early, we will explain how to calculate your R&D expenditure step-by-step.
Who can claim?
Currently, there are two R&D schemes to claim from – the SME scheme and the RDEC scheme.
To apply for the SME scheme, your company must have the following:
- less than 500 staff
- a turnover of under €100 million or a balance sheet total of under €86 million.
As a reminder, if your SME has any connected companies, this will affect the amount you can claim.
As of the 2023/24 tax year, the amount an SME can claim will be cut, so instead of being able to claim back an enhanced rate of 130% of eligible costs, this will drop to 86%.
SMEs that spend at least 40% of total expenditure on R&D activities will be able to claim a 14.5% credit rate, rather than the standard 10%.
In practice, the policy tweak means that R&D-intensive companies can claim back £27 for every £100 they spend on innovation.
The RDEC scheme is, somewhat controversially, more generous following the 2022 Autumn Statement.
From April 2023, the RDEC rate will increase from 13% to 20%, meaning that companies with:
- over 500 staff
- a turnover of over €100 million, and
- more than €86 million in gross assets, will be able to lower their corporation tax bill dramatically.
What you can claim on
R&D activities fall into two main categories:
- direct e.g. research, clinical trials, lab tests
- indirect e.g. providing training, hiring staff and security.
Other activities (or routine activities) are not eligible for R&D claims. This could be something like marketing or product packaging design, as they don’t contribute to research or towards a scientific breakthrough.
Even if your project is unsuccessful, you can still claim back on the work you’ve carried out in an attempt to provide answers to uncertainty.
You can claim R&D relief up to two years after the end of the project in question.
How to calculate your costs
Calculating R&D relief for an SME depends on whether you make a profit or a loss:
- For profit-making businesses, R&D tax credits reduce your corporation tax bill. The rate of relief is 25%. So if your R&D spend last year was £100,000, you could get a £25,000 reduction in your tax bill.
- If you are a loss-making business, you will receive your R&D tax credit in cash because you don’t have a tax liability to offset. The rate of relief is up to 27%. So if your R&D spend last year was £100,000, you could get a £27,000 cash credit.
RDEC is primarily for large companies, but the incentive is also for those SMEs who, in some instances, can’t use the SME R&D tax credit.
From 1 April 2023, the RDEC will increase to £20k, less a notional tax charge at the new main rate of 25%, resulting in a maximum payment to the company of £15,000 — an increase of 42% in the RDEC relief.
What next?
R&D tax credits are not as simple as you may think, but they’re definitely worth claiming when eligible.
So, if your company is looking to make advancements in the world of science and technology, we’d be happy to make sure you don’t lose out on a potential tax saving.
If you need help calculating and claiming your R&D tax credits, we are here to help.
Get in touch to discuss claiming R&D tax credits.
