What is R&D Tax Relief?
R&D Tax Relief is a tax incentive scheme in the UK, which offers innovative businesses the chance to reclaim up to 27% of their yearly R&D expenditure.* This allows them to enrich their cashflow, year after year, and reinvest into the growth of their business.
Businesses capture the benefits of R&D Tax Relief by filing an R&D Tax Credit claim to HMRC every fiscal year. Once approved by HMRC, R&D claims are paid out to businesses in different ways which affect how claimants can spend the R&D Tax Relief they receive.
In this blog, we’re going to focus on what businesses can spend R&D Tax Relief on, and how this compares to other forms of funding.
How can businesses use R&D Tax Relief?
How a business can spend R&D Tax Relief depends almost entirely on the R&D Tax Credits scheme they file under, and their financial position at the time of claiming.
The SME R&D Tax Credit Scheme
If you file under the SME R&D Tax Credits scheme as a loss-making business, you can reclaim up to 18.6% of your total R&D expenditure in cash. As of April 2023, you can even claim up to 27%, if you had invested more than 40% on R&D. However, if you’re a profitable business, you can up to reclaim 21.5% in the form of a corporation tax deduction.
Therefore, loss making businesses that file under the SME R&D Tax Relief scheme can spend their claim benefit on absolutely anything! HMRC refers to this as a repayable cash credit, which can be allocated to R&D or any other cashflow burdens that might be more pressing – the choice is yours.
In turn, if you’re making a profit and file R&D Tax Credits under the SME scheme, you don’t have this same freedom in how you spend your claim benefit. Instead, it’s pre-determined by the government that your R&D claims will be used to offset your current or future tax liabilities.
As we all know, paying Corporation Tax is an obligation of any UK-registered business, so receiving tax deductions is still highly beneficial and it frees up money to spend on other areas.
The RDEC R&D Tax Credit Scheme
The second R&D Tax Credit scheme is called the RDEC scheme. If you claim R&D Tax Credits under the RDEC scheme, your financial position doesn’t matter – you’ll receive up to 20% of your total R&D expenditure.
RDEC R&D Tax Credit claimants will almost always receive their benefit as a corporation tax deduction, but there are some instances where they can also receive a cash credit.
As HMRC want to ensure that the RDEC claim benefit is used to offset tax liabilities first and foremost, a repayable cash credit only occurs if the following conditions are met, and there is a remaining excess:
All Corporation Tax liabilities for the accounting period are fulfilled.
If the RDEC claim benefit remaining after step 1 exceeds the net value of the claim, the balance is withheld and carried forward for you to use in future periods.
HMRC has offset the tax benefit against any outstanding Corporation Tax owed for any other accounting periods, or any outstanding tax amounts such overdue PAYE or VAT liabilities.
So, which R&D Tax Relief scheme do you apply for? It’s not the case that you can decide which scheme better suits your business, they’re designed for businesses of different sizes.
To qualify for the SME R&D Tax Credits scheme, your business must have less than 500 employees, less than €100M in turnover, and less than €86M in gross assets. If your company exceeds these size metrics, you’ll have to file under the RDEC R&D Tax Credits scheme.
That covers the two different ways in which R&D Tax Relief can be used to benefit a business, and how the R&D claim spend can differ.
So, how does this compare to other methods of funding available to UK companies?
How can businesses use grant funding?
An alternative innovation funding tool is grant funding. Grant funding offers businesses a sum of money to fulfil a specific project, and to financially support innovators carry-out plans that will better society.
Grants are particularly attractive because they are non-repayable, non-dilutive and 100% guaranteed upon approval. For this reason, they are also highly competitive, making them less accessible than R&D Tax Credits.
When you apply for a grant competition, you need to submit a business plan including a detailed breakdown of how you intend to spend the grant, should you be successful.
If you do secure the grant, your spending must align with this roadmap. This makes spending a grant more regimented process than spending a cash credit R&D claim.
One generous feature of grant funding is that recipients can reclaim R&D Tax Relief on the grant! So, they can access money on top of free money! To learn the rules around how grant funding and R&D Tax Relief intersect, read our related blog: Can R&D Tax Credits and Grant Funding work together?
With the unique appeal of grant funding, it’s undoubtable that every eligible business should apply for a grant competition at least once! With assistance from a grant writing specialist, such as GrantEd, you can produce highly competitive applications that align with the detailed criteria of funding bodies like Innovate UK.
Currently, there’s a grant funding competition open for female entrepreneurs called the Women In Innovation Award. GrantEd is specialising in this area to help female founders produce stand-out applications with the help of model answers and comprehensive templates.
To discuss GrantEd’s grant writing service with a member of their team, schedule a meeting here.
How can businesses use revenue-based financing?
Revenue-based financing gives businesses capital in exchange for a percentage of their future revenue.
Funds are approved on the agreement that the recipient will repay a certain percentage of their revenue every month. For example, if a company takes out a £400,000 loan, they might agree to pay back 4% of their revenue per month.
Higher-revenue months will result in a larger monthly repayment, and equally, if revenue takes a dip, so will the demands of your repayment. This provides flexibility during unpredictable periods of revenue and makes revenue-based financing a fantastic funding option (that many businesses don’t know about)!
Whilst you can spend revenue-based financing on any costs associated with your business, there are certain providers that carry a strict eligibility criteria for businesses that they fund.
For example, Uncapped provides revenue-based funding for companies with an online model that have been trading for at least 6 months and bring in at least £100k in monthly revenue.
Overall, each form of funding comes with conditions. It’s arguable that R&D Tax Credits for loss-making SMEs provides capital with the most freedom to spend however the recipient sees fit. Businesses within this category can benefit hugely from claiming R&D Tax Relief. And remember – you can file an R&D claim every financial year!
As R&D Tax Credit Specialists, we help our clients’ businesses accelerate growth by utilising yearly R&D claims. The R&D Tax Relief scheme is the largest, most generous tax incentive scheme available to UK businesses, so if you’re not already claiming, and you’re spending money developing a new product, process, or service – you could be missing out on a substantial funding tool!
To explore claiming R&D Tax Credits, reach out to a member of our team. We would be happy to arrange a free, no-obligation R&D claim consultation to assess how much you could be owed.
*These are the updated figures in line with the new legislation announced in the April 2023 Spring Budget.