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What are Research and Development Tax Credits?

Research and Development Tax Credits are tax breaks provided by the Government to promote innovation within Companies.

A company’s corporation tax liability can be reduced by a percentage of expenditure on R&D.

R&D expenditure is often dismissed as there is no lab at the company’s premises, no white coated employees and no test tubes in use.

R&D can include software development which is the advancement of computer science.

R&D is defined as a company taking a risk by innovating, improving or developing a process, product or service.

A successful R&D claim and value of the claim:

  • Depends on the size of the company
  • Must relate to the company trade
  • Must demonstrate some scientific and technological advance
  • Must have scientific or technological uncertainties in the project that could not be readily available from a competent professional working in the field
  • Does not have to have a successful outcome and may have been aborted
  • Must be within the time limit – the normal time limit for making the claim is 2 years after the end of the relevant CT accounting period.

For small and medium sized companies the tax relief allowable in R&D costs incurred on or after 1 April 2012 is 225 per cent and 230 per cent from 1 April 2015 – that is for each £100 of qualifying costs, your company could have its corporation tax profits reduced by an additional £125 or £130 on top of the £100 spent.

Qualifying R&D costs of £100,000 from 1 April 2015 would have a saving of £26,000 of corporation tax (£100,000 x 130% x 20% = £26,000).

If there is a trading loss the R&D tax relief can be carried forward in the normal way or converted in tax credits – this is a cash amount paid to the company.

Qualifying R&D costs of £20,000 from 1 April 2015 and a taxable profit of £6,000 would have a tax credit of £2,900 (£20,000 x 130% = £26,000 use £6,000 against usual taxable profits = £20,000 x 14.5% = £2,900).

More information on the rates and allowances can be found here.

Statistics from the Government show that R&D claims are concentrated in companies with registered offices in London, the South East or the East of England (46% of all claims and 64% of the total amount claimed).  More information on these statistics can be found on this link.

Rawlinsons has made many successful R&D claims on behalf of clients, so if you think you could make a claim we can assist with ensuring you meet the criteria and the calculation of the qualifying expenditure. Just give us a call!

If you would like any other information please follow this link.