R&D Tax Relief is a generous scheme that gives you back up to 33% of your development costs as a tax break or a cash credit. How much R&D Tax Relief you can claim depends on a few factors.
The R&D Tax Credits scheme – also known as R&D Tax Relief – is a lucrative source of government funding.
Since its launch in 2000, it has paid over £40 billion in tax relief and cash credits across more than 500,000 claims.
The scheme works by reimbursing companies a percentage of their development expenditure. Here are the headline rates:
- Companies claiming through SME R&D Tax Relief can recoup up to 33.35% of their eligible expenditure
- Companies claiming through the RDEC scheme can claim up to 16.2% of their eligible expenditure
These are only the headline rates, though. Exactly how much your company can claim depends on three factors:
We’ll explore each of these factors below.
If you’re looking for an easy way to estimate your claim size, check out our R&D Tax Credits calculator. It will give you an estimate of your claim size in just a few seconds.
And if you want to make sure you’re claiming your full entitlement to relief, GrantTree’s R&D Tax experts are here to help. Just get in touch.
1. 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.
RDEC only allows companies to claim back up to 16.2% of their development costs.
RDEC is what’s called an above-the-line credit. This means it’s subject to corporation tax. So, while the RDEC rate is 13% for qualifying expenditure made before 1 April 2023, and 20% for expenditure on or after 1 April, the credit is worth between 10.5% and 16.2% after tax.
|SME R&D Tax Relief
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 everything that decides which scheme you should apply to.
2. Your company’s financial position
If you’re applying for the RDEC scheme, you’ll receive a credit worth 10.53% of qualifying expenditure made before 1 April 2023.
On expenditures on or after 1 April 2023, you’ll receive between 16.2% and 15%, depending on your corporation tax rate.
If you’re applying for the SME scheme, whether you are profitable, loss-making or breaking even impacts your relief rate.
|Relief Before 1 April 2023
|Relief From 1 April 2023
18.6% to 27%
16.34% to 21.5%
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 funding. If you’re profitable, you’ll receive most or all of your relief as a reduction to your corporation tax bill.
If your company is unprofitable, you can surrender your loss to generate a cash credit or carry it forward to offset taxes on future profits.
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.
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 130% for expenditures made before 1 April 2023 and 86% for expenditures made on or after 1 April.
Enhancement increases your eligible expenditure on your balance sheet by between 1.86 and 2.3 times.
Say you invested £100,000 on qualifying expenditure. After enhancement, this would be worth between £186,000 and £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 the corporation tax rate multiplied by the enhancement rate.
As a result, profitable companies are able to recoup between 16.34% and 24.7% of their eligible expenditure, depending on when their expenditure took place and your corporation tax rate.
If your company is unprofitable, SME R&D Tax Relief lets you surrender your enhanced expenditure in exchange for a cash credit.
The surrender rate – the size of cash credit your receive in exchange for your loss – is 14.5% for expenditures made before 1 April 2023 and either 10% or the full 14.5% if you have invested more than 40% of your total outgoings in qualifying expenditure.
So, you could surrender a £100,000 enhanced loss for a cash credit worth between £14,500 and £10,000.
That’s assuming your company is not impacted by the PAYE Cap, which limits the size of payable credit companies can receive based on their PAYE and NIC liability.
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.
If you invested £100,000 in qualifying expenditure before 1 April 2023, you’d be able to surrender the £130,000 created by the enhancement rather than the full £230,000.
That would yield a cash credit worth just £18,850.
This is a strange and unfortunate situation. You’ve worked hard to get your company to break even, yet you’re rewarded with less R&D Tax Relief.
3. Claim maximisation
The last factor affecting how much R&D Tax Relief you will receive is whether you have maximised your claim size.
R&D Tax Relief is a complicated scheme. It has lots of nuances and edge cases. For this reason, it’s easy to claim for less than your full entitlement by excluding eligible costs.
If you want to receive the maximum amount of R&D Tax Relief, you need to claim for every penny of eligible expenditure possible.
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 explain it engagingly and accurately in a comprehensive technical report, addressing the crucial questions in your additional information form.
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.
Secure your full entitlement
If you want to access your full entitlement of R&D Tax Relief without risking damage to your reputation with HMRC, GrantTree is here to help.
We have 12 years experience filing successful R&D Tax claims, securing more than £350 million for our clients across over 2,000 applications.
Whether you’re looking for help with a claim you’ve put together yourself or are looking for expert help preparing your submission from scratch, GrantTree’s R&D Tax experts can give you the support you need.