HMRC provides comprehensive criteria set for an R&D claim.
Many of you are involved in the activities which fall under the category of R&D unknowingly. According to HMRC R&D claim can be made by any project working for bringing innovation.
You qualify for an R&D claim if:
- You are UK based company?
- You are investing in creating some new methodology or improved tool?
- Improving technological or scientific efficiency?
- Facing uncertainty in your project?
- Trying to remove uncertainty?
HMRC will count any money you invest in developing something as R&D.
The money you spent on these is counted for your R&D claim:
> Staff
> Materials
> External contractors
> Sub-contractors
> Software licenses
Which scheme is right for your business?
Choosing the right scheme largely depends upon the size of your company.
SME:
Smaller companies with less than 500 employees with turnover limiting to £100 million or gross assets of £86 million, as well as startups, fall into the category of SME. Both loss-making and profitable SMEs can claim up to 33% of the R&D credit.
Profitable SME’s can claim for R&D tax relief to put tax break according to the amount of corporation tax.
RDEC:
Research and Development Expenditure Credit (RDEC) inculcates larger companies with more than 500 employees, a turnover of more than £100 million, or a balance sheet of £86 million.
Some factors like grants and sub-contraction can restrict SMEs from claiming via SME incentive and make them eligible to claim via RDEC scheme.
What evidence does HMRC need?
HMRC has set detailed eligibility criteria for R&D claims, which most of the businesses already meet without even realizing. HMRC does not have a fixed requirement of documentation as it varies for each business sector. Innovative and creative UK companies can make claims without any limitation of size or sector.
You can qualify for an R&D claim if your business has:
- Attempted to improve production efficiency?
- Made technological advancement by creating new service or tool?
- Faced uncertainties?
- Tried to overcome uncertainties faces?
- Invested in technological advancement?
- Tried to modify and improve existing service, tool, or methodology?
How much is claim worth?
The R&D credit scheme grants valuable cash for the business, which you can re-invest to expedite the growth of your business. The precise evaluation of R&D credit may vary depending on your qualifying R and D expenditure. Other factors like size, the amount of corporation tax you pay, and the current state of the company also determine the worth of your R&D credits.
The calculation of your R&D tax relief benefit is contingent on the category you fall in:
1: Profitable SME’s
Profitable SMEs can have 25% of their R&D costs refunded. If the R&D cost of your company is £100,000 in a year then its corporation tax liability would reduce by up to £25,000.
2: Loss Making SME’s
A loss-making SME can also get benefit by claiming R&D credit, which worth up to 33% of qualifying costs.
If the company spent £100,000 on R&D projects in a year then its potential R&D Credit would be £33,350.
3: Large Companies RDEC
Profitable and loss-making large companies equally can benefit from the RDEC scheme, both obtain an R&D Credit of up to 13% of their R&D spend. RDEC tax relief cost is subject to Corporation Tax.
If the company invests £100,000 on R&D projects in a year then its R&D Credit would be around £9,700 minimum.
- R&D tax relief is a Corporation Tax (CT) relief that reduces your company’s bills if you are liable to CT. Loss-making companies can also claim for a payable R&D credit which can be further reinvested for the projects.
- The Research and Development Expenditure Credit (RDEC) scheme was introduced in the Finance Act 2013, which allow companies without CT liability to get benefit in form of cash credit or tax reduction.