If your business is carrying out qualifying research and development (R&D) activities, you could be due a tax credit on your profits. The UK’s R&D tax credit system can be complex, so it’s essential to understand which scheme applies to you and how to claim the credit. In this blog post, we’ll explain the two primary R&D tax credit schemes in the UK – the SME scheme and RDEC – and how to account for them in your business accounts.
1) SME
The SME scheme is for smaller businesses that carry out R&D activities. To be eligible for the SME scheme, your business must have:
• A turnover of less than €100 million (£86 million) per year
• Fewer than 250 employees
If your business meets these criteria, you can claim a tax credit of 230% of your qualifying R&D expenditure. This scheme is administered through HMRC’s R&D Tax Credits Unit.
2) RDEC
The RDEC scheme is for larger businesses that carry out more complex R&D activities. To be eligible for the RDEC scheme, your business must have:
• A turnover of more than €100 million (£86 million) per year
• More than 250 employees
If your business meets these criteria, you can claim a tax credit of 12% of your qualifying R&D expenditure. This scheme is administered through HMRC’s Research and Development Corporation (RDEC).
How to account for R&D tax credits in your business accounts
When accounting for R&D tax credits in your business accounts, it’s important to differentiate between the amount of the credit related to current year expenses and the amount related to historical costs. You should also note which scheme you are claiming under – SME or RDEC.
1) Current year expenses
If you are claiming under the SME scheme, the credit for current year expenses is simply the amount of qualifying R&D expenditure multiplied by 230%. So, if your business spends £20,000 on qualifying R&D activities in a given year, it can claim a tax credit of £4600 (£20,000 x 230%).
2) Historic expenses
If you are claiming under the RDEC scheme, the credit for historic expenses is calculated as 12% of qualifying R&D expenditure. So, if your business spends £100,000 on qualifying R&D activities in a given year, it can claim a tax credit of £12,000 (£100,000 x 12%).
It’s important to remember that only expenses that are directly related to R&D can be claimed as a credit. For example, if your business spends £2000 on office supplies in a given year, this cannot be claimed as a credit against R&D expenditure.
When claiming the R&D tax credit, it’s also important to track which costs qualify for the credit and which don’t. Generally speaking, the following costs can be claimed as a credit:
• Staff costs – salary, wages and pension contributions
• Contractor costs – fee for services provided by an external contractor
• Subcontractor costs – fee for services provided by an external subcontractor
• Materials and consumables – the cost of goods used in the R&D process
• Travel and subsistence – costs incurred when travelling for work-related purposes
• Overheads – costs that are not specific to R&D but are incurred in the course of running your business
It’s important to note that the credit cannot be claimed against:
• Capital expenditure – the cost of items that will be used or consumed over a period longer than one year, such as equipment or machinery
• Research and development that is undertaken outside the UK
The R&D tax credit can be a valuable source of income for businesses that carry out qualifying activities. However, to ensure you’re claiming all the credit you’re entitled to, it’s essential to understand which scheme applies to you and how to account for it in your business accounts. Don’t hesitate to get in touch with your local HMRC office or speak to an accountant for more information.
