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A Complete Guide: R&D Tax Credit Calculation

Posted on November 17, 2021

The HMRC R&D Tax Credits scheme can bring your business remarkable benefits, with the scheme designed to encourage UK businesses to invest in innovation, and reward businesses for doing so. The scheme aims to give businesses a well-needed cash-injection, giving them money back for risk-taking to invest back into their business. 

The scheme offers Corporation Tax deductions and payable cash tax credits, with a maximum return of 33p for every £1 spent on Research and Development qualifying expenditure, the exact rate of the benefits for your business will depend on the size of it, the amount of Corporation Tax you are liable to pay, and whether your business is profit or loss-making. 

So what exactly does an R&D Tax Credit Calculation include?

What costs can be included in an R&D Tax Credit Calculation?

The costs that are included in a claim when they are incurred on resolving a technical or scientific uncertainty are:

  • Salaries for part-time or full-time staff members
  • Subcontractor costs (for SMEs)
  • Consumables (water, gas, electricity, prototypes not for sale)
  • Contract workers
  • Software license costs

SME R&D Tax Credits

The size of your business is a factor that is taken into consideration when it comes to the amount you will be able to claim, the size of the business will be classed as an SME if it:

  • Employs less than 500 staff
  • Has an annual turnover that does not exceed £86 million
  • OR a balance sheet that does not exceed £74 million

The status of an SME can change depending on whether you have had grants, subsidies and state aid, if this is the case you will claim under the RDEC scheme for large companies. 2021 statistics show that the average SME claim value is £57,330 which is a 7% increase from the previous year therefore demonstrating the benefits of the scheme for small businesses, this figure will of course vary depending on how much your business has individually invested on innovative projects.

Profitable SMEs Calculation

 Profitable SMEs will benefit from a savings rate of 25%, this is calculated through working out your qualifying expenditure which is the amount you will declare that you have spent on R&D. You will then enhance your qualifying expenditure by 130% which increases your R&D expense for the year and reduces your taxable profit, and finally you will subtract your original Corporation Tax amount from your new rate, to reveal the Corporation Tax saving.

An example of this would be:

Profit before R&D: £400,000

R&D Expenditure: £100,000

Corporation Tax prior to R&D Tax Credits Claim: £76,000

Qualifying Expenditure Calculation: £100,000 X 130% (Enhanced rate) = £130,000

Revised Profit: £400,000-£130,000 = £270,000

Corporation Tax: £270,000 x 19% = £51,300 (25% saving from R&D Tax Credits)

Corporation Tax Saving: £76,000 – £51,300 = £24,700

A quick way to determine your estimated claim value is to use our free R&D Tax Credits Calculator.

Loss Making SMEs

Loss Making SMEs can also reap the benefits of the scheme, giving them an additional option of not surrendering the R&D loss but to carry the loss further or backward against profits instead.

An example of this would be:

Loss Amount: £300,000

R&D Expenditure: £100,000

Corporation Tax prior to R&D Tax Credits Claim: £0

Qualifying Expenditure Calculation: £100,000 X 130% = £130,000

Loss after deduction of profit: (£300,000) – £130,000 = (£430,000)

Maximum Losses to surrender: £100,000 x 230% = £230,000

The company can now either carry the loss forwards to be offset against taxable points or the lower of 230% of qualifying expenditure or revised loss for the period is available to be surrendered to HMRC for a cash tax credit at 14.5% rate.

If the losses are surrendered, £230,000 X 14.5% = £33,350 (33% cash saving and carry forward £200,000 to the following year).

To find out more about how much you may be eligible to claim if you are loss-making, contact our specialist team at Green Jellyfish to discuss this further.

RDEC R&D Tax Credits

The RDEC scheme is targeted at large companies, offering private sector investments. The SME scheme is known for it’s more generous tax incentive, whereas the RDEC scheme is beneficial for larger companies. A business will be classed as a large company if it has:

  • More than 500 staff
  • More than £100 million turnover
  • More than £86 million in gross assets

The benefits for the RDEC scheme are that the rate is 13% of your qualifying expenditure, an increase of 1% was introduced in the Spring 2020 Budget. The tax credit is taxable at the normal 19% Corporation Tax rate which means an 11p return for every £1 spent, the benefit can be shown ‘above the line’ (ATL) making it visible as a form on income within your accounts, and also the credit is offset against the businesses tax liability or it can be in payable cash.

An example of this for a profit OR loss making company would be:

R&D Expenditure: £1,000,000

Above The Line Credit: £1,000,000 x 12% = £120,000

Corporation Tax Rate: £120,000 – 19% = £97,200

Claim Value: £97,200

The Process

The process for a claim would be to first contact your accountant or an R&D specialist like Green Jellyfish, who will then confirm your eligibility. They will then collect technical and financial information for eligible projects such as payslips, timesheets, invoices and project plans, and then a separation of time and costs for eligible and non-eligible activities and if it is needed, they will review contracts between a company and any subcontractors that assisted with the project to ensure compliance. 

The claim narrative will then be written following detailed guidelines, and any claim documentation will be prepared, and then the claim will be reviewed and submitted with any relevant and supporting documentation. A successful claim usually be paid out within 28 days of it being submitted unless the case is enquired or rejected. 

 To find out more about how Green Jellyfish can help you with your R&D Tax Credits claim calculation, or to simply get an estimate of how much you may be entitled to, book a free, no-obligation phone call to discuss this further.