How is R&D Tax Relief Calculated?
The process of claiming research and development (R&D) tax relief can be complex. But with nearly £4 billion awarded each year, it is well worth the time and the effort to find out whether you qualify.
The amount of tax relief available under the scheme depends on the size of your business. Small to medium-sized enterprises (SMEs) apply through a different scheme to larger businesses, with different calculations for each.
SME or RDEC?
SMEs with fewer than 500 staff and a turnover of less than €100 million (or a balance sheet total under €86 million) qualify for SME R&D Relief.
This allows companies to deduct up to 130% of their qualifying costs from the year’s profits, in addition to the usual 100% reduction.
Companies that are too large to meet the SME criteria can still make a claim for a Research and Development Expenditure Credit (RDEC), worth 12% of qualifying costs. This is offset against your tax liability, although it can be payable as cash in some circumstances.
Projects do not have to be successful to qualify, and incomplete, scaled back or abandoned R&D may apply if it falls within accepted accounting periods.
However, certain costs only qualify for part deductions. For example, you must reduce subcontractor or external staff payments to 65% of the original expenditure.
Some R&D expenditure is obvious, but you may not be aware of all the costs that can qualify for tax credits. R&D Tax Shop can help identify and review the costs associated with your project, as it is important to submit an accurate claim.
Ineligible costs include the wages of support staff who would be employed regardless, and the cost of any patents or trademarks used to protect the outcome of the R&D.
• Wages and pensions for staff directly working on the R&D project
• Subcontractor and freelance wages
• Consumables such as water, fuel and power used in the R&D process
• Software specifically used for the R&D project
• Payments to clinical trial volunteers
• The cost of designing and constructing prototypes to test your R&D
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