Dont miss out on R&D Tax Credits !
Research and Development (R&D) Tax Credits have grow to be a valuable source of funding for companies and can useful resource in accelerating business growth. This weblog encompasses everything you need to be aware of about the scheme to assist you identify if you are missing out on claiming expenditure spent on research and development.
What are R&D Tax Credits?
R&D tax credits are an incentive designed via the Government to reward innovative companies who spend cash on growing new products, processes, or services; or enhancing present ones. R&D tax credits can assist your company grow without diluting your equity.
What is the definition of an SME?
For the purpose of Research and Development Tax Relief HMRC defines an SME as a business with not more than 500 employees and an annual turnover not exceeding £100 million. However, the rest of the UK government does not use this definition.
For the purposes of gathering statistics, the Department for Business defines SMEs as companies with less than 250 employees.
For accounting purposes, Companies House defines a small business as employing less than 50 people and a turnover below £6.5 million and a medium business as less than 250 employees and a turnover below £25.9 million.
What costs are eligible?
- Costs that qualify for R&D Tax Credits should be revenue expenditure i.e elements that operate the day to day running of the business such as:
- Staffing costs
- Subcontracted R&D
- Externally Provided Workers (EPWs)
- Consumables
- Software
- Payments to subjects of medical trials
But don’t forget about the expenditure still needs to be spent on creating new products, processes or services; or enhancing current ones.
What format does the claim take?
Research and Development is a huge scope and can apply to any sector. If companies are spending cash on their innovation, they can develop an R&D tax credits claim to receive a cash payment or Corporation Tax Reduction of up to 33% of their last two completed accounting periods.
How long does it take to receive the capital?
HMRC aims to make 95% of payments inside 28 days for SMEs claiming R&D tax credits. However, this does not include the time it takes for the cash to arrive in your bank account which can be up to 10 days once the claim is approved.
If you are a large company your claim under the Research and Development Expenditure Credit (RDEC) scheme may additionally take longer to be received due to the scheme’s greater complexity and HMRC’s checks.
Can you claim R&D Tax Credits after securing an R&D Grant?
A common misconception is that innovation grants and R&D tax credit are mutually exclusive. However, this is no longer the case, however their relationship can be complicated.
RDEC is regularly mislabelled as a scheme that is solely accessible to large companies. However, for SMEs that have received state aid in the form of grant funding, this is an important additional source of non-dilutive funding.
One of the advantages of RDEC claims is that they can be accounted for above-the-line in your income statement (also known as your profit-and-loss account), providing a positive impact on visible profitability in your accounts. This visibility has a positive impact on R&D funding decisions.
Despite frequent misconceptions, SMEs awarded grant funding by the UK Government can continue to utilise both the SME R&D tax credits scheme and RDEC to claim tax relief on eligible R&D costs incurred.
Additionally, if you have been subcontracted to do R&D via a large company you can claim this by way of the RDEC scheme also. However, if you are working for another SME they will claim for these activities, therefore before claiming it is important to assess the nature of your subcontracting agreement and who ‘owns’ the R&D activity and is therefore entitled to claim.
Future of R&D Tax credits
On the 1st of April, the Government’s Finance Bill 2021 sets out to make some modifications to the R&D tax credit scheme to target perceived fraudulent claims using structures set up in the UK to claim a repayable credit even though no R&D work was actually carried out in the UK.
In order to stop this abuse, the government has brought a cap on the amount of the payable R&D tax credits that a qualifying loss-making company can claim.
The cap will restriction the payable R&D tax credits to three times the total PAYE and NIC liability of the company for the 12 months plus £20,000.
How will I know if my claim will be capped?
A company making a claim for a payable R&D tax credit of much less than £20,000 will not be impacted by the cap.
The Government has additionally introduced two tests that companies will need to pass to not have their claim capped. These tests require that a company’s personnel are creating, preparing to create, or actively managing Intellectual Property (IP) arising from the R&D project and that its expenditure on work subcontracted to, or agency workers provided by, a related party is less than 15% of its overall R&D expenditure.
- A great deal of genuine SME claims will be affected through the introduction of the new cap.
- Companies that are in all likelihood to be impacted include:
- Companies that outsource large parts of their R&D projects.
- Companies where a large share of the R&D costs occur from consumables (eg raw materials)
- Would you like to know how R&D Tax Credits can benefit your business?
Ensuring that R&D Tax Credits is utilized efficiently means that you will not miss out on potentially sizable income. With our professional advice, we can assist you navigate, cautiously format and optimise your future position.
Reach Out
If you have a disruptive enterprising project or innovation, why not contact us? A brief chat with one of our innovation consultants will help you determine whether grant funding could get your project off the ground.
Why use grant funding experts?
Although there are many benefits to seeking grant funding, the thought of applying can be confusing, time-consuming and stressful. Using the creative and technical skills of a professional Innovation grant writing consultancy will strengthen your business in translating technologies and business models into a language and format assessors understand; increasing the chance of success. If you have a disruptive ambitious project or innovation, why not contact Capti Innovation.