R&D Tax Relief Overview: Research and Development (R&D) tax relief is designed to support companies that work on innovative projects in science and technology. It can be claimed by a wide range of companies that seek to research or develop an advance in their field. The relief can reduce a company's tax bill or, for some small or medium-sized enterprises (SMEs), provide a cash credit.
Types of R&D Relief:
- SME R&D Relief: For companies with fewer than 500 staff and either turnover under €100m or a balance sheet total under €86m. This allows SMEs to deduct an extra 130% of their qualifying R&D costs from their yearly profit, as well as the normal 100% deduction, making a total 230% deduction.
- Research and Development Expenditure Credit (RDEC): For larger companies or SMEs that have been subcontracted by a larger company to do R&D work. This is a tax credit worth 13% of the qualifying R&D expenditure.
Industries Benefiting from R&D Relief: R&D tax relief is commonly claimed by businesses in various sectors, including:
- Technology and Software Development: Innovations in software, algorithms, and IT solutions.
- Manufacturing: Development of new production processes or improvements in existing ones.
- Engineering: Advances in engineering techniques, materials, and systems.
- Life Sciences and Pharmaceuticals: Research into new drugs, medical devices, and healthcare technologies.
- Agriculture and Food Production: Innovations in farming techniques, food processing, and sustainability.
- Automotive and Aerospace: Development of new vehicles, components, and aerospace technologies.
Application Process for R&D Relief
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Identify Qualifying Projects and Expenditure:
- Determine which projects qualify for R&D relief.
- Identify the costs associated with these projects, including staffing, materials, and overheads.
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Prepare and Submit the Claim:
- Compile a technical narrative explaining the nature of the R&D activities.
- Prepare financial information detailing the qualifying costs.
- Submit these details as part of the company’s Corporation Tax return (CT600).
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Advance Assurance:
- For first-time claimants, companies can apply for Advance Assurance. If granted, HMRC will not query the first three years of R&D tax relief claims.
- To apply for Advance Assurance, complete and submit the online application form, providing details about the company and its R&D activities.
- HMRC will review the application and may ask for further information or clarification.
Calculated Example of R&D Tax Relief
Example: Let's consider a fictitious company, TechInnovate Ltd, which operates in the software development industry.
- Total R&D Expenditure: £200,000
- Company Type: SME
- Profit Before R&D Relief: £500,000
Calculation for SME R&D Relief:
- Identify qualifying R&D costs: £200,000
- Enhanced Deduction: 130% of £200,000 = £260,000
- Total Deduction: £200,000 (original) + £260,000 (enhanced) = £460,000
- Adjusted Profit: £500,000 (profit before relief) - £460,000 (total deduction) = £40,000
- Tax Saving: Corporation tax rate of 19% on £460,000 = £87,400
By claiming R&D tax relief, TechInnovate Ltd reduces its taxable profit significantly, resulting in a tax saving of £87,400.
Assistance from RDA Accountants
RDA Accountants can assist with the entire R&D tax relief claim process through our partners at Swoop. This partnership ensures that businesses, regardless of their industry, can navigate the complexities of the R&D tax relief system efficiently and maximise their entitlements, reducing the risk of errors and potential rejections. Contact us today to learn how we can support your R&D tax relief claim.