How Are R&D Tax Credits Calculated
If you think your company may qualify for r&d tax credit, you will no doubt be eager to find out how much you might be owed from this generous government incentive. It may be the boost your business desperately needs in order to break through with your innovative product or service. Eligible R&D costs can include: staff and subcontractor costs, materials and consumables including heat, light and power as well as some types of software.
R&D tax credits are calculated based on which category your company falls into out of the following:
- Profit Making SME
- Loss Making SME
- Large Companies – RDEC
In this article we will explore how tax credits are calculated for each of these business categories. If you would like to speak to an expert advisor in more detail about whether your company qualifies and how much for, then please get in contact with our team for free today.
Profit Making SME’s
The rate of r&d tax relief for profit making SME companies is 25%. For example, if your business spent £100,000 on research & development projects in one year then its corporation tax liability would reduce by up to £25,000. Your exact return will depend on your qualifying R&D activities and costs.
Loss Making SME’s
The SME R&D tax credit scheme also allows loss-making companies to claim a payable credit. The way R&D tax credits are calculated for a loss-making company is different to a profitable company, and the benefit received is a R&D Credit.
If you’re a loss-making SME, you’ll receive your R&D tax credit in cash because you don’t have a tax liability to offset. The rate of relief is up to 33%. So if your R&D spend last year was £100,000, you could get a £33,000 cash credit.
While at first glance it may seem that a loss making SME receives a larger tax relief, this is in fact not the case. If your company are making a profit, you will have already reduced your taxable profits by the R&D expenditure under normal Corporation Tax rules. The R&D tax credit is in addition to this initial reduction.
Large Companies – RDEC
The RDEC scheme (Research & Development Expenditure Credit) is primarily for large companies. Large companies are defined as businesses with 500 or more employees and either more than €100m turnover or €86m gross assets. There are some cases in which SME’s can also claim R&D tax credits via RDEC, for example if they were unable to use the SME R&D tax credit scheme due to restrictions.
Your RDEC claim is calculated as a taxable credit of 13% of your identified R&D costs. Since this is taxable, it results in a cash benefit of 11% after tax.
These costs can be offset against your tax bill or, if there is no tax payable, you will receive the net amount as cash. So if your R&D spend last year was £100,000, you could get a £11,000 cash credit or tax reduction via RDEC.
Discuss your R&D tax credit with an expert
We can help determine if your activities are eligible for R&D tax relief and assist you in gaining the best results. We work on a no win, no fee basis, so why not get in touch with our team for free today? Visit our contact us page or call us now on 0115 855 0960. You can also email us at firstname.lastname@example.org.