R&D Tax Credits is a generous scheme that gives you back up to 33% of your development costs as a tax break or a cash credit. But exactly how much you can claim depends on several factors, including your company’s size and financial position.
The R&D Tax Credits scheme – also known as R&D Tax Relief – is extremely generous. Since it was launched in 2000, it has paid out over £34 billion in tax relief and cash credits across more than 470,000 claims.
The scheme works by reimbursing companies a portion of their development expenditure.
Micro, small and medium-sized businesses can claim back 33p for every £1 they invest in eligible R&D. Large businesses can claim back up to 13p per £1 invested.
Exactly how much your company will be able to claim depends on three factors. They are:
We’ll explore each of these factors below.
If you’re looking for an easy way to figure out how much you can claim, check out our R&D Tax Credits calculator. It will give you an estimate of your claim size in just a few seconds.
SME scheme or RDEC
R&D Tax Relief is split into two schemes: SME R&D Tax Relief and RDEC.
SME R&D Tax Relief is much more generous. It allows companies to recoup up to 33.35% of their development costs as a cash credit or a corporation tax reduction.
By comparison, RDEC only allows companies to claim back up to 13% of their development costs.
In addition, RDEC is what’s called an above the line credit. Which means it’s taxed at 19%. Net of tax, RDEC lets companies recoup just 10.53% of their costs.
|SME R&D Tax Relief||RDEC|
Should I apply for SME R&D Tax Relief or RDEC?
As the name suggests, small and medium-sized companies should generally apply for SME R&D Tax Relief. Large companies need to apply for RDEC.
HMRC defines a large company as one with:
- More than 500 employees
- Or an annual turnover of over €100 million
- And a balance sheet of over €86 million
A business below these thresholds counts as an SME.
You can read more about how HMRC defines small, medium and large companies in this blog.
In some cases, small and medium companies have to apply for RDEC.
For example, if they are part of a group that contains larger businesses. Or if they have financed their R&D with grant funding.
In this blog, you’ll find a complete breakdown of all the things that decide which scheme you should apply to.
Your company’s financial position
Your company’s financial situation – whether you’re profitable, loss-making, or breaking even – also impacts how much R&D Tax Relief you can claim.
This is only true if you are applying for SME R&D Tax Relief. If you are applying for RDEC, you’ll receive a cash credit worth up to 10.53% of your qualifying expenditure, regardless of your financial situation.
If you’re applying for SME R&D Tax Relief, here’s how much you can expect to claim
|SME R&D Tax Relief||RDEC|
As you can see, the amount of relief you can claim varies quite a bit.
Your financial situation also determines how you will receive your relief. If you’re profitable, you’ll receive all or most of your relief as a reduction to your corporation tax bill.
If your company is unprofitable, you’ll receive your relief as a cash credit.
Finally, if it’s at or near break-even, you’ll probably receive some tax relief plus a cash credit.
How does my financial position affect my R&D Tax Relief claim?
To understand why your financial position affects your SME R&D Tax Relief claim, we first need to understand how the SME R&D Tax Relief scheme works.
The two key concepts here are R&D enhancement and surrendering your loss.
R&D enhancement is a mechanism within SME R&D Tax Relief that artificially increases the size of your eligible expenditure.
The enhancement rate is currently 130%. This means you can increase your eligible expenditure by 2.3 times. So, instead of claiming R&D Tax Relief on £100,000 worth of expenditure, you would claim for £230,000.
This might seem strange. And a little overgenerous from the notoriously frugal HMRC. But it’s how the scheme was designed.
By enhancing your eligible expenditure, the SME R&D Tax Relief artificially increases your company’s costs for the financial period.
If your company is profitable, this has the effect of decreasing your profits on paper. Lower profits mean you have to pay less corporation tax.
The amount of tax you save works out to 19% – the corporation tax rate – of the 130% enhancement. That’s the equivalent of 24.7% of your eligible expenditure.
If your company is unprofitable, SME R&D Tax Relief lets you surrender your enhanced expenditure at a rate of 14.5p per £1.
In other words, you could surrender your £230,000 enhanced expenditure for £33,350. This would generate a payable tax credit worth 33.35% of your eligible expenditure.
Find out more about whether it’s a good idea to surrender your losses, here.
Note: As of 1 April 2021, businesses are only be able to claim a tax credit worth up to 300% of their combined PAYE and NIC liability, plus a £20,000 buffer.
You can read more about this policy, which is called the PAYE Cap, and how it will impact your claim, in our detailed blog.
If you’re exactly at break-even, you won’t have to pay any corporation tax. But, you also won’t be able to surrender your initial eligible expenditure because you won’t be in a loss.
In that case, you will only be able to surrender the artificial loss created by enhancement. £130,000, in our example.
That would yield a cash credit worth just £18,850.
This is a strange and unfortunate situation. You’ve done all the hard work of getting your company to break even. But you’re rewarded with less R&D Tax Relief.
You can read more about this eventuality – which our R&D Tax Credits specialists refer to as ‘the valley of death’ – in this article.
The last factor affecting how much R&D Tax Relief you will receive is whether you have maximised your claim size.
R&D Tax Credits are a complicated scheme. It has lots of nuances and edge cases. For this reason, it’s easy to neglect to claim for certain kinds of expenditure.
But, if you want to receive the maximum amount of R&D Tax Relief, you need to claim for every penny of eligible expenditure possible.
This means identifying all qualifying R&D and then combing your financial records to spot all the direct and indirect expenditure connected to it.
The easiest way to do this is to work with an R&D Tax Credits specialist like GrantTree.
Our technical experts will isolate all valid R&D and defend it with a watertight technical narrative.
Meanwhile, our tax experts will ensure all of your eligible expenditure is incorporated into your claim, securing your company the most amount of relief possible.
Maximise your claim with GrantTree today
If you want to file a fully-maximised R&D Tax Credits claim for your business, get in touch with GrantTree today.
One of our R&D Tax Credits experts will be right with you.