The Business Owner’s Guide to Calculating for R&D Tax Relief
Running a business can be costly, but thankfully, saving tens of thousands of pounds is possible by reducing income tax liabilities through the federal research and development (R&D) tax credit. Unfortunately, many companies aren’t fully benefiting from it because of misinformation about its proper application. To gain clarity around this topic and potentially lower your tax liability, use this article as your guide.
What Are R&D Tax Credits?
Research and development (R&D) tax credits are designed to support companies in science and technology in developing new or improved products, processes, inventions, and other business components. Eligible businesses can benefit from a cash grant or a tax relief of up to 33 per cent of qualifying expenditure.
How Do You Know If Your Company Is Eligible for the R&D Tax Credit?
In the UK, your organisation must be a limited company and registered to pay corporation tax to be eligible for R&D tax credit. This means partnerships, sole entrepreneurs, and public liability companies are not eligible.
Besides product development, R&D credit eligibility can also apply for activities and operations, like quality enhancements, software development, and new manufacturing technologies and techniques. Established companies and even startups may be eligible to apply for the R&D tax credit against their payroll tax.
Your organisation could be eligible for this tax credit if you:
- Improve existing products or services
- Create new or innovative products
- Develop software, processes, patents, or prototypes
- Have engineers, designers, or scientists in your team
Which Type of R&D Relief Is Right for Your Organisation?
R&D relief comes in two types: small and medium-sized (SME) R&D tax relief and Research and Development Expenditure Credit (RDEC). The type of relief available your organisation can qualify for depends on the size of your business and if you have been subcontracted.
If you have a small business, SME R&D tax relief might be right for you. This scheme lets you deduct a normal one hundred per cent and an extra 130 per cent of qualifying costs from yearly profits, totalling 230 per cent. It also allows you to claim a tax credit worth up to 14.5 per cent of the surrenderable loss if your company is making a loss. To be eligible for it, your organisation must have less than 500 staff and a turnover of fewer than 100 million pounds.
On the other hand, RDEC is more applicable for larger companies. It can be claimed if your organisation has been subcontracted to do R&D work for a big company.
How Do You Calculate Your R&D Tax Credit?
To calculate your organisation’s R&D tax credit, check first your eligible R&D costs. Reduce agency staff costs to 65 per cent, add this to the R&D costs, then get the additional deduction by multiplying it by 130 per cent. Finally, add this value to your R&D expenditures to determine your business’s enhanced expenditure figure.
Claiming the R&D credit can be confusing with all the expenses you have to track and compute for. It’s easy to get overwhelmed checking documentation, expenditures, and qualifying activities to determine if your organisation is eligible for this scheme. It can also be challenging to know how your company can use this credit properly. Thankfully, you can have a better understanding of identifying and claiming it appropriately by seeking reliable accountants to help.
If you need more information about claiming your R&D tax credit, reach out to 1to1 Accountants. Our expert acocuntants offer a wide range of accountancy services, including corporation tax, personal tax affairs, self-assessment tax, and more. Contact us to know more about how we can help!