If you’ve heard of the Research and Development Tax Relief (R&D Tax Relief) Scheme, you may already know that the UK government allows innovative businesses to claim back up to 27% of the money they spend on bringing new products, processes, and services to market – by filing R&D Tax Credits.*
If you weren’t aware of this, don’t worry! You can claim R&D Tax Credits every financial year, so as long as your company is incurring costs through R&D activity, it’s not too late to benefit from the scheme.
In addition, if you’re new to claiming research & development tax credits, you aren’t limited to just the previous financial year. You can reclaim costs incurred up to two years prior!
But how are R&D Tax Credits calculated?
The answer to this is dependent on several factors, such as:
the size of the company that is submitting the R & D tax credit claim;
the financial position of your company submitting the R & D tax credit claim;
which R&D Tax Credits scheme the business files under;
the amount of money the business has spent on qualifying R&D activities.
Firstly, let’s clarify what we mean by ‘qualifying R&D activities’. When filing R and D Tax Credits, you can claim back money spent on the following areas:
Staffing costs
Subcontractors
Externally Provided Workers (EPWs)
Consumables
Software
Payments to the subjects of clinical trials
To learn about qualifying R&D activities in more detail, check out our specialised blog.
In this blog, we’ll be explaining how research & development tax credits are calculated by breaking down each of these factors and providing real-world examples.
👉🏼 Factor #1 – Company size
There are a set of metrics regarding company size that have a real impact on how HMRC calculates your R & D Tax Credit claim.
If your business has less than 500 employees, less than €86M in gross assets, and is turning over less than €100M, you’ll be able to reclaim up to 27% of qualifying R&D expenditure.
If your business has over 500 employees, more than €86M in gross assets, and is turning over more than €100M, you’ll be able to reclaim 20% of qualifying R&D expenditure. Exceeding these metrics also means that your R & D claim is subject to corporation tax, which reduces it to around 15% of qualifying R&D expenditure.
Example:
An early-stage agricultural company is developing robotics to tend to land more efficiently and reduce human error. The business is comprised of 12 employees, and they are yet to see any turnover as their product is still a prototype. Clearly, they fall well under the key company size metrics outlined above. Therefore, this business can claim R&D Tax Credits to reclaim up to 27% of qualifying R&D expenditure.
So, what’s preventing us from giving a more precise percentage? That’s where the second factor comes in…
👉🏼 Factor #2 – Company’s financial position
The financial position of the business at the time of filing an R & D Tax Credit claim plays a role in calculating its value – but only if the claimant falls below the three company size metrics we just mentioned.
So, if your business has less than 500 employees, less than €86M in gross assets, and is turning over less than €100M, here’s how your company’s financial position can affect how your r&d tax relief is calculated:
If you’re loss-making, R&D Tax Credits allow you to reclaim 27% of qualifying R&D expenditure. You’ll receive your r & d claim benefit in cash, directly deposited in your bank account from HMRC.
If you’re profit-making, R&D Tax Credits allow you to reclaim 21.5% of qualifying R&D expenditure. Alternatively, you’ll receive your r & d claim benefit as a tax rebate, or tax deduction off current or future corporation tax (CT) liabilities.
If the claimant’s business has outgrown these boundaries, financial position doesn’t affect the R & D claim calculation – 20% is a fixed rate. In this case, you’ll also receive the R&D Tax Relief benefit as a tax rebate, or deduction off current or future CT liabilities.
Now we can complete our example:
An early-stage agricultural company is developing robotics to tend to land more efficiently and reduce human error. The business is comprised of 12 employees, and they are yet to see any turnover as their product is still a prototype. Clearly, they fall well under the key company size metrics outlined above. As they’re not yet market-ready, the business is not profitable. This enables them to reclaim the full 27% of qualifying R&D expenditure – as cash!
👉🏼 Factor #3 – Which R&D Tax Credits Scheme you file under
These first and second factors in calculating an R & D Tax Credit claim – company size and financial position – are the defining characteristics of two separate R&D Tax Credits schemes.
The SME (Small to Medium-sized Enterprises) R&D Tax Credits scheme caters for businesses that fall below the size metrics we previously outlined.
SME R&D Tax Relief also takes into account whether the claimant is profitable or loss-making.
Exceeding the company size metrics mean that your business qualifies for the RDEC (Research & Development Expenditure Credit) R&D Tax Credits scheme, where calculations aren’t affected by financial position.
Another condition that determines which research and development tax credits scheme you’ll file under is whether your business has previously received grant funding.
The requirement for accessing grant funding and R&D Tax Credits on the same project revolves around whether your grant is classed as ‘notified state aid’ (government funding regulated by the European Commission).
If the grant you received is deemed to be notified state aid, such as the Innovate UK Smart Grant, you won’t be able to file under the SME R and D Tax Credits Scheme.
But good news, you’ll still qualify for the RDEC R&D Tax Credits Scheme.
To learn more, check out our separate blog detailing how grant funding and R&D Tax Credits work together.
👉🏼 Factor #4 – how much your business has spent on qualifying R&D expenditure
And finally, the obvious one – your R&D Tax Credits are calculated from how much you spend on eligible R&D activities. The more you spend, the more you can claim back!
When businesses claim R&D Tax Credits, the financial report is where your R&D Tax Advisor will itemise relevant areas of spending and form the basis for calculating your R & D tax credit claim.
These four factors are the key determiners of how R&D Tax Credits are calculated, and how much R&D Tax Relief HMRC believe businesses should receive.
Hopefully, these guidelines help you to estimate how much funding you could gain from the research and development tax credits scheme!
Nearly all of our clients that start claiming R and D Tax Credits find that their claims become a crucial part of their annual cashflow – whether it be in cash, or money saved on corporation tax that can now be injected back into the business.
To enquire into our fixed fee R&D Tax Credits service, or find out whether your business can access R&D Tax Relief, make an enquiry today.
Our team is here to help in any way we can!
*These are the updated figures in line with the new legislation announced in the April 2023 Spring Budget.