What Is R&D Tax Relief?
Research and Development Tax Relief is a UK tax incentive designed to encourage companies to invest in innovation.
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How the R&D Tax Relief Incentive Works
Companies that Invest in developing new products, processes or services; enhancing existing ones or are using an innovative alternative to their industry standard approach will be eligible for a cash payment and or Corporation Tax reduction.
If you meet the requirements, you can claim R&D Tax Relief for your last two accounting periods. For example, while in your 2018 accounting period, you can consider your R&D tax credit 2017 and your R&D tax credit 2016.
They are considered based on your spend on R&D. Qualifying expenditure is identified and increased by the appropriate rate to produce your ‘enhanced expenditure’. When deducted from your taxable profits, or added to your loss, this will give you a Corporation Tax reduction if your company is in profit, a cash credit if your company is loss-making or a combination of both. On average, 33p in the £1 of all qualifying costs can be claimed back.
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Forms of R&D Tax Relief Explained
There are two forms of R&D Tax Relief: SME R&D Relief and Research and Development Expenditure Credit (RDEC).
SME R&D Scheme
The SME R&D scheme is more monetary beneficial than the RDEC scheme. However, there are certain criteria a company must fall under to qualify for this scheme. R&D tax credit scheme for SMEs offers a benefit of up to 33% – so up to 33p for every £1 spent on qualifying expenditure.
To qualify for the SME scheme your company must have:
• Less than 500 employees
• A turnover not exceeding £100m
• Balance sheet total not exceeding £86m
RDEC Scheme
The Research and Development Expenditure Credit (RDEC) has now changed from the large company scheme from April 2016. The credit is calculated at 11% of your company’s qualifying R&D expenditure. The credit is taxable and applies to only those businesses that fall into HMRC’s criteria.
To qualify for the RDEC scheme your company must have:
• More than 500 employees
• A turnover exceeding £100m
• Balance sheet exceeding £86m