Research and development credits – known as R&D relief – can offer attractive tax benefits for eligible companies. In this blog, we’ll cover the different types of reliefs that are available, depending on the scale of your organisation.
What is R&D Relief?
R&D-related reliefs were introduced with the aim of encouraging companies to invest in new products, systems or services. Different benefits are available for different-sized companies. For small and medium enterprises (SMEs), R&D relief can be used to reduce a corporation tax bill; for large companies, there is an incentive known as the Research and Development Expenditure Credit (RDEC), which replaced the Large Company Scheme in 2016. RDEC enables eligible companies to claim cash credits or reduce payable amounts of tax.
R&D Relief for Small or Medium Enterprises
To be classed as an SME for the purpose of claiming R&D tax relief, you must have:
- 500 staff or less.
- A turnover of less than €100m or a balance sheet total under €86m.
- SMEs that are providing services as subcontractors to the relevant project – or which are part of a larger company – are not eligible.
- R&D relief cannot be claimed if the project is already receiving notifiable state aid.
- When trying to figure out if your organisation is an SME, you will need to take into account any partner or linked companies. Your company is classed as ‘linked’ if it holds over 50 of the voting rights in another company, or if another company holds over 50 of the voting rights in your Your company is considered to have a partner company if you hold over 25 of another company’s capital or voting rights, or if another company holds over 25 of your capital or voting rights. If you have a linked company, you should include the staff, turnover and balance sheets of such in your total; if you have a partner company, you will need to include a percentage of the other company’s staff, turnover and balance sheet in your total (appropriate to the proportion of capital/voting rights connecting the companies).
- Linked/partner companies can affect how eligible your company is to claim R&D relief, so it’s important to consider this information carefully and make the correct calculations. Do consider hiring an accountant to ensure that you stand the best chance of receiving the desired reliefs, and to make certain that your submission is accurate and complete.
If you qualify for SME R&D relief, the benefits are extremely attractive. As well as the normal 100 deduction, eligible companies are able to deduct an extra 130 of qualifying costs from their annual profit (creating a potentially huge total of 230 ). If the company makes a loss, a tax credit of up to 14.5 of the surrenderable loss can be claimed.
Moreover, for companies making their first R&D claim, Advance Assurance is an option. This guarantees that all R&D claims will be accepted, provided that they are claimed within the first three accounting periods, and reflect what was previously discussed/agreed.
R&D Relief for Large Companies
To be classed as a large company for the purpose of claiming R&D tax relief – the Research and Expenditure Development Credit – you must have:
- More than 500 staff.
- A turnover of more than €100m or a balance sheet total that exceeds €86m.
Simply put, the RDEC scheme offers a tax credit for a company’s R&D expenditure. The scheme gives back up to 8.8p for every £1 of eligible expenditure before 1st January 2018. For expenditure after 1st January 2018, companies can receive up to 9.7p for every £1 spent.
Small and medium enterprises that have provided subcontracting services for a qualifying R&D project may also be eligible to claim RDEC relief.
As can be seen from the information above, some very appealing reliefs are available to qualifying businesses – and meeting the eligibility criteria is not as difficult as some may expect. In our next blog, we’ll explore the key points of eligibility as well as how to make a claim.