UK Research and Development (R&D) Tax Credits and Tax Reliefs apply equally to profitable and loss-making companies. This is sometimes misunderstood with people thinking that a company needs to be profitable to benefit.
How much cash can be claimed by loss-making companies?
A loss-making SME can receive a tax credit cash payment worth up to 33p per £1 spent on qualifying R&D costs. E.g. a qualifying cost of £100,000 on R&D activities can generate a cash payment of £33,350 even though the Company may never have made a profit or paid any corporation tax!
How is the R&D claim worked out?
For SMEs, an R&D claim creates an additional deduction in the tax calculation for the year when the R&D costs were incurred. In a loss-making company, this will increase the losses and there is a choice of receiving a cash payment in exchange for surrendering the R&D losses or carrying forward the extra losses to use to offset future profits or a combination of both.
The cash payable is calculated at 14.5% of the loss surrendered versus the 19% tax rate if it is used to offset a profit, so it is cash now at a slightly reduced rate as opposed to a potential tax offset at a better rate in the future. Companies have two years from the end of the relevant accounting period to make an R&D claim and within that period they can also reverse the decision to surrender a loss for a cash payment and recalculate the claim to carry forward the loss. This can be beneficial if suddenly there is a profit to offset in the later years.
What costs qualify?
The majority of costs claimed by SMEs are usually on:
- Staff salaries (allowed at 100% of the relevant cost) e.g. if an employee’s salary cost, including the gross salary + employers NI + pension payments comes to £50,000 in the R&D claim year and half their time was on R&D the qualifying R&D cost would be £25,000.
- Hiring sub-contractors (usually only allowed at 65% of the relevant cost) e.g. £100,000 spent on R&D would give a qualifying R&D cost of £65,000.
- Energy and materials consumed in the R&D such as in making prototypes (at 100% of the relevant cost).
- Software licences for software needed to undertake the R&D (at 100% of the relevant cost).
What activities qualify?
The activities that qualify are broader than just cutting edge innovation, with a lot of software development and manufacturing process development or improvement and new product development all likely to include some qualifying R&D activities.
If you think you may qualify or just want to understand more about what R&D tax credits and tax reliefs are and how they work contact Linda for a free exploratory chat.