In 2000, to encourage scientific and technological innovation and growth, the government introduced the R&D Tax Credit Scheme which is available to companies across the United Kingdom. To understand exactly how R&D tax credits work, click here.
While submitting a research and development tax credit claim might seem time-consuming and complicated (made.simplr has the solution, but more on that later), it is worthwhile taking the time to explain to your clients why it’s so beneficial.
Firstly, you need to see if they are eligible for R&D credit. Chances are, if they have developed, improved, or even attempted to improve but failed, a new product, process, or service with the aim of benefitting the relevant industry as a whole, your client will be eligible.
See R&D tax credits explained – what are they? Is your client’s company eligible?
It’s important to reiterate that it’s not only pharmaceutical and technology companies performing science experiments in a laboratory that qualify for this benefit. All companies across all industries are eligible to apply, including small businesses and start-ups – even your own accounting firm(!) – as long as they meet the aforementioned criteria.
What are the benefits of R&D tax credits?
To put it broadly, R&D tax credits provide substantial financial advantages to businesses, ones that all companies would welcome, especially in these current financially difficult times.
R&D tax credits reduce the tax liability and inject cash back into the company for reinvestment into further research and development, job creation, future investor interest, and company advancement. The ultimate end result? Healthy industry competition and economic growth.
The cash amount or the tax liability you are set to receive depends on whether you are claiming via the SME scheme or the Research and Development Expenditure Credit (RDEC) scheme. According to HMRC, the relief SMEs can get is 230% on their qualifying R&D costs (calculated at 130% of their qualifying costs from their profit, as well as the standard 100% deduction, to make a total 230%). If they are making a loss, they can receive a cash credit. For larger companies claiming via the RDEC scheme, a taxable credit is available at 11% of qualifying R&D expenditure, and again, loss-making companies receive a cash credit, subject to certain restrictions.
Let’s break it down in detail. R&D tax credits can benefit your client in the following ways:
- By providing a lump sum of cash which will not only help with cash flow but can be reinvested to further your R&D efforts, hire new staff, or buy new equipment. Let’s face it, additional funds will always be most welcome.
- By offering a significant reduction in tax liabilities (230% on qualifying R&D costs for SMEs and 11% for larger companies).
- A possibility of job protection. For example, if the pandemic has resulted in one aspect of your business closing down, the affected staff can be used in research and development instead. Employees get to keep their jobs and you can claim for R&D tax credit. It’s a win-win.
- Any losses under either the SME or RDEC schemes may be carried forward to be set against future years.
- They provide a reliable form of business funding seeing as a business can make a claim each year.
- Attract potential investors, which will, in turn, mean more funding for the business.
Here’s an example using a fictitious company’s profit and loss:
| SME worked example | Profit and Loss Account (£) | RDEC worked example | Profit and Loss Account (£) |
| Sales | 1,000 | Sales | 1,000 |
| Cost of sales | (500) | Cost of sales | (500) |
| Gross profit | 500 | Gross profit | 500 |
| R&D qualifying expenditure | (100) | R&D qualifying expenditure | (100) |
| Other expenses | (150) | 11% RDEC on expenditure | 11 |
| Total operating costs | (250) | Other expenses | (150) |
| Net profit before tax | 250 | Total operating costs | (239) |
| Net profit before tax | 261 | ||
| Tax due (see below) | 24 | Tax due at 20% | 52.2 |
| Corporation Tax Computation (£) | Corporation Tax Computation (£) | ||
| Net profit before tax | 250 | Net profit before tax | 261 |
| Less R&D relief (130%) | (130) | Corporation Tax due at 20% | 52.2 |
| Adjusted profit before tax | 120 | ||
| Corporation Tax due at 20% | 24 | ||
| Corporation Tax payable (£) | Tax payable (£) | ||
| Corporation Tax due | 52.2 | ||
| Less tax credit | (11) | ||
| Corporation Tax | 24 | Corporation Tax payable | 41.20 |
How are the R&D tax credit benefits received?
HMRC aims to deal with 95% of payable tax credit claims within 28 days of receiving the claim. Naturally, this isn’t cast in stone and will depend on the complexities of the company and the claim, the volume of claims to be processed, and whether HMRC picks up any irregularities.
Even your accounting firm can benefit
As mentioned previously, the R&D tax credit benefit can apply to all industries, accounting practices included.
Information Communication Technology (ICT) moves at a rapid rate, with new hardware, software, and IT solutions being developed all the time. Has your company made any technological advances to adapt the way you do business?
- Have you installed new software to improve operations? Whether it’s to improve efficiency or communications, this is another possible eligible activity.
- Have you increased your cyber-security? In this fast-paced and ever-changing digital world, protecting your and your client’s data is more important than ever. Investing in a secure cyber security system could be regarded as an eligible R&D activity.
- How about moving your systems onto the cloud? Having all your services and technology available remotely is vital in remaining competitive and relevant in this work-from-home, digital age.
What is important to remember is that the new technology or product needs to represent an advancement in the field of ICT. But seeing as the industry moves at such a rapid rate, it is highly likely it will qualify for the tax benefit.
Why made.simplr? How can we help you?
At made.simplr we know how important a good relationship is between accountant and client. We want what is best for you and you want what is best for your client. The good news is we are the experts in R&D tax credit, and as a result have developed an automated software solution that has taken all the administrative headache out of the claims process. It is guaranteed to produce an optimised R&D tax credit claim with the best possible outcome for your client.
Contact us today for a no-obligation demo.
