Research and Development (R&D) tax credits are a valuable government subsidy that can significantly reduce your company’s tax bill, and even get you some cash back.
What are R&D Tax Credits?
R&D tax credits are a means of encouraging companies to innovate through a financial reward for developing new technologies to substantially improve products, processes, devices, materials and/or services.
Companies which are eligible for the tax incentives are extremely diverse. We have prepared claims not just for high technology companies in software, aerospace, defence, automotive etc. but also more 'traditional' manufacturing and engineering companies.
Who can claim?
All companies, large and small, can claim if they undertake qualifying work - even if they do not pay corporation tax because they are unprofitable.
There are two schemes under which a claim can be made.
1. Small and medium-sized businesses (SMEs)
The R&D tax credits available to smaller companies have substantially increased in recent years.
A super deduction of 230% of qualifying expenditure is applied for profitable companies (leading to a tax saving of around 25% of the expenditure, in addition to the ‘normal’ tax relief), while loss-making companies can claim a cash payment from HMRC of 33.35% of qualifying expenditure.
A company can generally claim under this scheme where they have:
- less than 500 staff; and either
- less than €100 million turnover; or
- €86 million gross assets.
If a company meets the above criteria but their R&D is either funded (for example, by grants) or subcontracted to them by third parties, they will most likely need to make a claim under the R&D Expenditure Credits scheme (see below).
2. Research and Development Expenditure Credits (RDEC) scheme
RDEC allows larger companies, and SMEs in certain circumstances, to claim a cash credit against the cost of their qualifying R&D activity.
The credit is recognised in pre-tax profits in the company’s financial statements. From 1 January 2018, the credit rate increased to 12% (from 11%). As with the small scheme, loss-makers are able to claim cash back from HMRC, subject to certain conditions being met.
The RDEC credit is itself subject to corporation tax, so the net ‘post-tax’ cash benefit that it generates is around 10% of qualifying R&D expenditure.
Which costs qualify for R&D Tax Credits?
Certain costs incurred in undertaking eligible development work can qualify for enhanced tax relief and credits. These include:
- Staffing costs and external workers – for time spent directly and indirectly on R&D.
- Consumable items – including power and water costs, software used for R&D and consumable materials.
- Certain payments to sub-contractors.
- Prototype costs.
A claim for R&D tax credits must be made within two/three years of the expenditure being incurred, depending on the date of the company’s accounting year-end.
How can Hazlewoods help?
Hazlewoods R&D tax specialists have a wealth of experience in preparing R&D tax claims and make the process quick and painless. With the benefit of our knowledge and experience, most claims that we prepare are processed efficiently by HMRC and repayments are usually made within a matter of weeks.
In the year to 30 April 2017, the Hazlewoods Innovation Team identified qualifying R&D expenditure of over £28.5 million for our clients, generating R&D tax repayments of nearly £4.2 million.
Don’t miss out! Contact us today to arrange a free initial consultation to explore whether your company could benefit from making a claim.