A large number of small and mediums sized enterprises (SME's) are missing out on the Research and Development (R&D) tax relief scheme, where they can obtain tax relief on R&D expenditure with either a 24.7% or 33.35% cash return for every £1 they spend on qualifying costs.

Whilst recently HMRC have been chasing or closing many other tax planning initiatives, this particular scheme is the opposite and HMRC have been actively encouraging SME's to capitalise.

R&D Explained...

The Fundamentals

First thing is to establish which type  of company you fall under and what rules apply for your bracket. There are two types of relief available:

  1. SME Tax Credits (STC)
  2. Research and Development Expenditure Credits (RDEC)
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STC Scheme Explained

First you must establish if you qualify as a SME, a company must be:

business R&D advice

an independent company

This usually means that your business must be a privately owned establishment, as opposed to a public limited company.

Employ less than 500 employees

As an SME, you must not employ over 500 employees as this would take your business out of the SME bracket.

under £100 million turnover

To be eligible for the STC Scheme, your business must have turned over less than £100 million.

As well as the criteria above, your company must also be a UK resident trading company (usually excluding partnerships or sole traders). Furthermore, you will also need to include linked companies and partnerships when working out if you qualify as an SME or a large company. Any company not qualifying as an SME will be classed as a large company for R&D and will fall under the RDEC scheme, not as generous but still one of great value especially when it comes to large research projects.

What qualifies as R&D

The R&D must be for a specific project which aims to make an advance in science or technology, excluded sciences are social sciences like economics or a theoretical field such as pure maths.

It must be a project related to your existing registered trade or one you intend to start up as a result of the R&D project results.

To receive the relief you need to explain and demonstrate:

How you overcame uncertainty.

What you tested and/or tried to overcome this uncertainty.

How you looked for an advance in science and/or technology.

How this couldn't be easily worked out by a professional in this field.

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RDEC Scheme Explained

This scheme can also be claimed by SME's and large companies sub-contracted to do R&D work for a large company. This is a tax credit which is:

R&D advice

Above The line

This benefit is shown as ‘above the line’ (ATL) – which means that it is visible as a viable income in your accounts.

13% of your R&D expenditure

An RDEC tax credit is worth up to 13% of your qualifying R&D expenditure.

standard tax rates

RDEC is taxable at the standard Corporation Tax rate (19%)  meaning the benefit is worth 19p for every £1 spent on R&D.

RDEC is a scheme predominantly used by bigger businesses. The new system also means now large loss-making companies can claim cash receipts from HMRC. The repayment is subject to a PAYE and National Insurance cap, this is to avoid non-UK present organisations claiming cash repayment. Since RDEC is fair to your company’s tax position, the benefits that you receive are easier to forecast. Which provides far greater stability and makes it much easier for larger businesses to factor the relief into their financial decisions.

Learn more about r&D claims

If you would like to learn more about R&D and find out if your business qualifies for either STC or RDEC schemes, reach out to our team for a full business consultation to discover more.