![\"R&D](\"http:\/\/my-brains.co.uk\/jackross\/wp-content\/uploads\/2022\/06\/diego-ph-fIq0tET6llw-unsplash-scaled.jpg\")
<\/a><\/figure><\/div>\n\n\n\nThey may no longer be much of a secret, but they are still a remarkably effective way for innovative companies to get something extra back from the tax system. Here\u2019s a look at how they work, what the benefits are and what the future might hold for R&D tax credits.<\/p>\n\n\n\n
There are two R&D tax credit schemes \u2013 nominally, one for smaller companies called the SME scheme, and one for larger companies called RDEC (that\u2019s short for research and development expenditure credit).<\/p>\n\n\n\n
Actually, RDEC can also be of use as a fallback option to smaller companies that do not qualify for the SME scheme on a technicality.<\/p>\n\n\n\n
The SME scheme<\/h2>\n\n\n\n
The definition of an SME (Small and medium-sized enterprises) in R&D terms may surprise you. It is a company with fewer than 500 employees, and either less than \u20ac86 million in gross assets or \u20ac100m in turnover.<\/p>\n\n\n\n
As you can imagine, by this standard, most companies in the UK are SMEs. And the good news is that the SME scheme is more generous than RDEC.<\/p>\n\n\n\n
If you make a profit, it allows you to claim back on average an extra 25p in the pound. This is at the current 19% corporation tax rate and only for qualifying R&D expenditure. <\/p>\n\n\n\n
If you make a loss you can either, carry that loss forward to be used against future profits, or surrender R&D loss for a cash refund at a reduced rate of 14% instead of 19%, returning approximately 18p to the pound. While this is a lower rate of return, it provides you additional cash that could be crucial for a start-up trying to develop a new product.<\/p>\n\n\n\n
For loss-making SMEs, the payable R&D credit (for accounting periods starting on or after 1 April 2021) is capped to \u00a320k plus 300% of the company’s total PAYE and NIC liability for that period.<\/p>\n\n\n\n
So, if you spent \u00a320,000 on qualifying R&D, that would equate to a \u00a35,000 R&D tax credit benefit if you were in profit and a \u00a36,600 benefit if you made losses. Very handy for cashflow and reinvestment in the business \u2013 and average SME claims are actually much higher. In 2018\/19 the average was worth \u00a357,228.<\/p>\n\n\n\n
You may be able to hire a new technical expert to help with future R&D or invest in new equipment with this windfall.<\/p>\n\n\n\n
RDEC<\/h2>\n\n\n\n
If you employ more than 500 people, and either have more than \u20ac86m in gross assets or \u20ac100m in turnover, then RDEC is for you.<\/p>\n\n\n\n
RDEC provides a flat rate benefit of 13% for qualifying expenditure, regardless of whether you make a profit or a loss. Because it is primarily for larger companies, the expenditure (and therefore the cash sums involved) tend to be bigger.<\/p>\n\n\n\n
So if you spent \u00a31m on qualifying R&D, you would be able to claim back \u00a3130,000. In 2018\/19 the average RDEC claim was worth \u00a3632,931.<\/p>\n\n\n\n
How does my company qualify for R&D tax credits?<\/h2>\n\n\n\n
You have to be a limited company, and you have to be spending money on research and development. This is because the benefit is administered through the corporation tax scheme and is calculated as an enhanced deduction on your expenditure.<\/p>\n\n\n\n
As R&D tax credits are claimed through the tax return, they are received retrospectively to the R&D activity taking place. You can claim back for two consecutive accounting periods, so if it is your first claim but you have been innovating for some time, fear not. You can get two years\u2019 worth of R&D tax credits at once.<\/p>\n\n\n\n
In order to support your claim you will need to provide a short summary explaining how the project:<\/p>\n\n\n\n