Research & Development Tax Relief Example
Research and Development tax relief is a government tax relief that is awarded to businesses for investing in innovation in the form of research and development.
Investing money into developing new systems, processes, products, services, materials or devices; or changing or modifying an existing one, can qualify your company for R&D Tax Relief. The work must be part of a specific project to make an advance in science or technology, but this cannot be within a social science or a theoretical field such as pure maths. The project must relate to your company’ trade. This could either be an existing trade or one that you plan to start up based on the result of the Research and Development.
To qualify for R&D Tax Credits you need to do the following:
- Show that you looked for an advance in the Science and Technology field – not just an advance for your business.
- Show how you had to overcome uncertainty – your project should be something that isn’t known to be scientifically or technologically feasible when you make or discover it.
- Explain how you tried to overcome this uncertainty – this can be a simple description of the successes and failures you had during the project.
- Show how the project couldn’t be easily worked out by a professional in the field – you can do this by showing that other attempts to find a solution have failed.
There are two different types of R&D relief. Which type you may qualify for depends on the size of your company and whether the project has been subcontracted to you or not.
Small And Medium Sized Enterprises (SME) R&D Relief:
SME R&D relief can be claimed by small or medium sized enterprises that have less than 500 staff members and a turnover of under £100 million or a balance sheet total of under £86 million.
This allows the company to deduct an extra 130% of their qualifying costs from the yearly profit, on top of the normal 100% deduction, which makes a total 230% deduction. This deduction helps to reduce the company’s corporation tax liability.
To give an example:
R&D expenditure incurred: £100,000
Normal 100% deduction: £100,000
Additional 130% deduction: £130,000
Total allowable deduction, 230%: £230,000 (£100,000 + £130,000)
If the company is loss making, SME R&D relief still allows the company to claim a tax credit worth up to 14.5% of the surrenderable loss.
To continue the above example, if this company was loss making, a R&D repayable tax credit of £33,350 can be claimed. This is calculated by multiplying the surrenderable loss of £230,000 by 14.5%.
Research And Development Expenditure Credits:
Research and Development Expenditure Credits (RDEC) can be claimed by large companies for working on R&D projects. RDEC can also be claimed by SMEs and large companies who have been subcontracted to do R&D work by a large company.
The RDEC is a tax credit for 12% of the qualifying R&D expenditure. For example, if a company had qualifying R&D expenditure of £100,000, they could claim an R&D Expenditure Credit of £12,000 (£100,000 X 12%).