Research and development (R&D) tax relief claims can offer your company a significant amount of money to cover the costs of taking on a variety of projects. Many business owners often miss out on this cash benefit as they aren’t sure if they have projects that make a scientific or technological advancement. In fact, if you have spent money developing or enhancing a product or service, you are likely to have made an advancement in science or technology and your company can claim back large amount of money.
If you aren’t sure whether your company is eligible, it is always worth checking with an R&D specialist to make sure you aren’t missing out on money that could help you grow your business. However, R&D tax benefit calculations will take a variety of different factors into account depending on your company’s situation, status, and the amount of qualifying R&D expenditure you have.
Whether you’re a profitable SME, a loss-making SME, or a large regime claiming Research and Development Expenditure Credit (RDEC), your R&D tax credits will be calculated with different factors in mind. Below, we’ve listed a couple of detailed R&D tax credit calculation examples to help you gain a better understanding of the R&D tax credit scheme.
SME Scheme Examples
On average, a profitable SME can expect a saving of around 25%. If a company spends roughly £250,000 on R&D projects in a single year, then you can expect to save around £62,500 in corporation tax liability. However, this can vary between 14.5% and 33% if your company is loss-making.
According to the HMRC, an SME is defined as a company with fewer than:
- 500 employees
- €100 million turnover
- €86 million balance sheet
Assuming your business fits these criteria, you can check below for example calculations for R&D tax credits.
A Profitable SME R&D Tax Credit Calculation
Let’s assume the following:
- Your business has made profits of £650,000 for the year
- With Corporation Tax at 19%, you’ll be expected to pay £123,500
- Your business spent £120,000 on R&D expenditures
SME R&D relief is 230%, meaning your enhanced deduction will be:
- £120,000 x 230% = £276,000
- Deduct £120,000 in R&D expenditures
- Total R&D enhanced deduction is £156,000
This means your revised profit will be £494,000 (£650,000 – £156,000). With Corporation Tax at 19%, this means you’ll have to pay £93,860. This is a saving of £29,640 which is close to a 25% saving.
Loss-Making SME R&D Tax Credit Calculation
Let’s assume the following:
- Your business made a loss of £450,000 for the year
- Your business spent £80,000 on R&D expenditure
First, we’ll work out your R&D enhanced deduction. This will be:
- £80,000 x 230% = £184,000
- Deduct £80,000 in R&D expenditures
- Total R&D enhanced deduction is £104,000
This means your revised loss for the year will be £554,000. With SME R&D relief at 230%, this means your maximum R&D tax credit surrenderable loss available to surrender to the HMRC will be £184,000 (£80,000 x 230%).
The maximum tax credit you’ll receive is this value multiplied by the 14.5% of the surrenderable loss. This means you’ll get a maximum of £26,680 (£184,000 x 14.5%). This is a saving of roughly 33%.
Large Company RDEC Example
The Research and Development Expenditure Credit (RDEC) calculation is a little different. We purely work with clients who fall into the SME limited company category which allows us to use our experience and expertise for more traditional sectors. Having said this, we wanted to show you an example of the RDEC scheme so you can understand how this may work for larger businesses.
Assuming you’ve spent £150,000 on R&D expenditure, here are the basic calculations:
- Annual Turnover: £1,400,000
- R&D Expenditure: £150,000
- Other Expenditures: £600,000
- Profit or Loss Before Tax: £550,000
- Tax Charge (19%): £104,500
If you don’t make an RDEC claim, you can expect to pay roughly £104,500 in taxes.
Here’s what happens when a larger company makes a claim. Using the same figures above, here’s what you could save with a RDEC claim.
- RDEC (12% of R&D Expenditure): £18,000
- Profit or Loss Before Tax: £568,000
- Tax Charge (19%): £107,920
- Corporate Tax Payable (Tax Charge – RDEC): £89,920
- Net Savings: £14,580
- Net Benefit: 9.72%
For a tax-paying company, the RDEC will reduce a company’s Corporation Tax liability. For loss-making companies, RDEC will create a credit payable immediately. Cash RDEC credit value is subject to additional steps, such as being capped based on the PAYE and NI paid to HMRC for staff members.
Subcontractors R&D Tax Credits Example
For subtractors, the calculations and their inclusions within the R&D claim are complex. It’ll require professional assistance from tax credit experts to clearly identify which subcontractors are eligible for R&D relief for their involvement in a project.
In most cases, SME companies can include around 65% of subcontracted costs. The costs will need to be adjusted to the lower of the invoice value and the cost of the subcontractor.
For larger companies, subcontractors can only be included if they are a qualifying body, an individual or a partnership where each member is considered an individual. If a larger company employs an SME to undertake R&D activities, but cannot claim R&D tax relief (for instance, because they are also a company), then it’s possible to make a claim under the RDEC.
Helping your SME with R&D tax credit claims
Our team has a 100% record in claiming R&D tax credits for clients in various different sectors. We’ve worked on claims from £10,000 right the way up to £1million + so have a varied set of experience. Some of the sectors Veritas is particularly good at dealing with include construction companies, the recycling sector, civil engineering firms, and electrical contractors.
Whichever your sector, one of our in-house experts will be delighted to book a no-obligation call to ascertain your eligibility. There’s nothing to lose by picking up the phone or dropping us an email. Don’t be one of the many business owners that miss out on claiming back large amounts of money and get in touch today.