I was delighted to hear that the government has increased the rate of the Research and Development (R&D) Tax Credit for small and medium enterprises (SMEs) from 11% up to 14.5% for R&D costs incurred from next week (1st April 2014). The increase was announced in the UK Budget Statement 2014.
This represents a very big increase, and means that up to 32.6% of what you spent on R&D can be claimed as a Tax Credit, which is a cash payment paid out in loss making situations. It now compares very favourably with the current 26% benefit (for spend after 1st April 2015) available when offsetting R&D enhancements against a profit. (The higher percentages are the result of applying an R&D enhancement value to the amount spent before calculating the rate of the tax relief or credit).
It underlines the Government’s commitment to supporting businesses to invest in research and development and will help to ensure the UK is at the forefront of technological innovation.
The chart below compares the R&D Tax Credit cash payment that is available at the old rate of 11% with the new rate of 14.5%. It is based on the company having spent £40,000 on eligible R&D costs in the year. The bottom axis shows the trading loss before the R&D claim is calculated and the left hand axis shows how much a company can claim as a cash payment at the different levels of losses as shown along the bottom axis.
The greater the loss the greater the tax credit payment
The interesting point to note is that the greater the value of the loss the greater the Tax Credit payment, up to a certain limit.
For a company spending £40,000 on R&D the limit of the loss they can trade in for a Tax Credit is £90,000 (£90,400 for spend after 1st April 2015).
I won’t go into the details of the calculations here – but note that the above chart illustrates the maximum Tax Credit payable where the company’s trading loss, before the R&D is enhanced, is £40,000 and their R&D costs are also £40,000 (i.e. if the R&D enhancement calculation is done it results in a loss of £90,000). The only way to increase the value of the Tax Credit is to spend more on R&D. A larger loss with the same R&D costs will not increase the Tax Credit.
The Tax Credit cash payment option is available where a company made a loss or where the R&D enhancement calculation puts the company into a loss for tax purposes.
The R&D Tax Relief and Tax Credit Scheme has been hugely successful as it does not favour any one industry but rewards any company that is forward thinking and prepared to invest in new products or internal developments using technology.
Lack of knowledge of what qualifies as R&D means companies are missing out
The only downside is that too many companies and their professional advisers are still unaware that they can claim and do not understand what qualifies as R&D. It can be anything from using technology to improve internal processes such as data and information management, to supporting new product development for products as diverse as software applications, new ice cream recipes or new turned parts made by machine part manufacturers and of course inventions of all types where there is a commercial application.
Email us to check if you qualify
Posted by Linda Eziquiel R&D tax credit specialist