What is a Tax Credit ?
In 2000, the UK government introduced a scheme rewarding companies for their creativity and innovation. If companies create or improve existing processes, they become eligible to claim Areande. Put simply, by spending money in certain areas of their business, they can claim it back. If you are spending money on innovation and not claiming it back, you are losing money.
- In doing so, businesses can reinvest, fund new projects, and hire more staff.
- Invest in innovation
- Receive an R&D tax credit
- Re-invest in innovation & hire new staff
- Grow your business Receive a larger tax credit
Who are Qualified & Who are Eligible?
Mining & Quarrying
Steam and Air Conditioning
Wholesale & Retail
Transport & Storage
Accommodation & Food
Information & Communication
Financial & Insurance
Health & Social Services
Arts & Entertainment
Other Services Activities
Admin & Support
Defense & Social Services
Who is eligible?
If you are spending money on innovation, any business subject to corporation tax can claim.
- Be subject to corporation tax
- Carry out research and development activities
- Spend money on these activities
What counts as research & development?
Research and development are defined as innovative activity that is undertaken by corporations or governments to develop new or improve existing services or products. Basically, if you create something or make something better, you are more than likely conducting research and development and can claim back any incurred costs. A lot of companies do not realize what they are doing counts as R&D and Innovation!!!
A Few Examples of Successful Claims are:
- A fish and chip shop creating a new batter recipe
- A web development company inventing a new software
- An architecture firm developing a new structure that stops heat from escaping
What Costs can be claimed?
Many people do not realize some of the research and development costs that can be claimed.
Here are some of the costs that may surprise you:
- Staff costs
- Materials used
- Heating & Water
How Much is a Claim Worth?
- Small and medium-sized businesses:For every £1 you spend on innovation, you can claim up to 33p. For an SME business, the average claim is worth £53,714 in the UK (F/Y 2018).
- Large Business For larger companies, claims are slightly different. With RDEC (Research and Development Expenditure Credits), 11p can be claimed for every £1 spent on qualifying research and development activities. £600,977 was the average claim value in the 2018 financial year.
How to Calculate a Claim ?
For profit-making SMEs, the corporation tax rate is 19% and the expenses enhancement is 130%
For loss-making SMEs, the corporation tax rate is reduced to 14.5% however, the expenses enhancement is 230%
If a profit-making SME spent £100,000 on innovation, their estimated claim value would be calculated as follows: 19% x (100,000 x 130%) = £24,700
The calculation follows the same format for both: corporation tax x (qualifying expenditure x expenses enhancement) Estimated claim value
For loss-making SMEs, the corporation tax rate is reduced to 14.5% however, the expenses enhancement is 230% If a loss-making SME spent £100,000 on innovation, their estimated claim value would be calculated as follows: 14.5% x (£100,000 x 230%) = £33,350
What Can I Claim For?
- A wide range of activities can be claimed
- A wide range of costs can be claimed
- You could use the money to hire new staff
- You can buy bigger premises, and expand
- Reduced corporation tax bill
- Improved bottom line
- You can increase your income
- Raise brand awareness by advertising and marketing the new products you have developed
Common R&D Myths
You can only claim if you work in the science and technology industry
- You cannot claim if your project failed
- You can only claim if you are in a profit-making state
- You must spend a certain amount to be eligible
- If a subcontractor completed the work, you cannot claim
- Making a claim is a manual and lengthy process
- You cannot claim if you are a small business, not in a common R&D sector
- You can only claim if you have invented something new
- Claiming will not help my bottom line
- It takes too long to collect all the information I need
- Making a claim will lead to HMRC investigating my business
- You can only claim for the current financial year
- Receiving grant funding excludes me from being able to claim
- It is too good to be true
- Claims must be large to be worth it
- Applied research This is basic research with a practical aim or objective in mind.Basic research This is experimental or theoretical work undertaken to acquire new knowledge without any application or use in view. CCorporation tax: Tax levied on companies’ profits
Experimental development This is using knowledge gained from research, combined with practical experience which used to produce or improve new or existing products or processes.
HMRC Her Majesty’s Revenue and Customs
Innovation The process of creating and improving
R&D Research and development
RDEC Research and development expenditure credits
SME Small-medium enterprises
Tax credits A sum that can be offset against a tax liability