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Loss-making SMEs who are carrying out innovation can receive relief in the form of a cash payment, which is generally £33.35 for every £100 spent on qualifying R&D activities.
This is a vital source of funding to allow reinvestment in R&D projects.
The relief allows you to take an extra 130% deduction of their qualifying costs, in addition to the normal 100% deduction from their yearly profit.
The losses generated are surrendered in exchange for a tax credit at 14.5%.
A company has identified £100,000 qualifying expenditure incurred on its R&D project.
Trading loss pre R&D (100,000)
R&D enhancement (130%) (130,000)
Trading loss post R&D (230,000)
The amount available for surrender for a tax credit is the lower of the R&D enhancement and the trading loss post R&D. In this case, the company would receive a £18,850 cash payment from HMRC which they can now use to fund R&D within their business.
It is also possible for an R&D claim to turn a profit-making SME into a loss position for tax purposes. These companies will be able to benefit from both a reduction in its tax bill (or repayment of tax paid) and a payable tax credit at 14.5%.
Our expert team will help you identify your R&D tax benefit based on your qualifying R&D costs and activities.
R&D tax relief claims must be submitted no later than two years after your accounting year end.
For example, a business with an accounting year end of May 31st 2018 has until May 30th 2020 to claim or lose out.
The R&D claim is quantified based on the time spent on R&D activities in the accounting period. This may be impacted by the start and end date of the R&D project.
The project starts when you begin to identify the technical issues that need to be resolved. The project ends when uncertainty is resolved or the project ceases.
For example,
A company created a working prototype following significant research, design and testing, at which point the R&D had ended. The prototype had gone into production and became available on the market.
3 months later, customers found that the product was becoming too slow due to certain functionality being unable to withstand frequent use. This was not something the competent professionals within the company had come across before and due to the bespoke nature of the product, there was no publicly available information that could help resolve the issue.
If this happens, your R&D may restart due to the identification of another technological uncertainty. You can claim for another period of R&D while you try to resolve it.
Parminder is a CTA qualified Corporate Tax Specialist with significant R&D Tax experience.
Virali specialises in Research and Development tax relief, an area which she has been solely focusing on since 2016.
