How to calculate the value of your R&D tax credit claim

Calculating R&D tax credits

At the mention of anything regarding tax, many of us automatically recoil, convinced that what ensues will be beyond our understanding. It’s for this reason that businesses often miss out on claiming R&D tax credits when carrying out innovative projects. These credits, however, can prove a significant cash injection particularly for SMEs, as the rewards can be substantial.

The exact figure depends on a number of factors, but it’s possible to get an idea of how much you can claim for by following some simple steps. Here’s a helping hand to get you started.

Step 1: Which scheme?

The size of your business will determine which scheme you can claim under. If you have fewer than 500 employees and an annual turnover of under €100m, you’ll be claiming under the SME scheme. This means you can recover up to 25% of eligible expenditure if you’re profit-making, and up to 33% if you’re loss-making.

If your employee numbers or turnover exceed the above figures, you’ll need to claim under the RDEC scheme, which offers up to 12% remuneration of eligible expenditure.

Step 2: Work out your expenses

Qualifying expenditure for R&D tax credit claims is limited to staffing costs such as salaries and pension contributions, software, consumables and subcontractors. You can only claim that which has been spent directly on the project, so you may need to apportion salaries and software costs, for example, appropriately.

Step 3: Have you received grant funding?

Grant funding and subsidies can have an impact on what costs you can claim for and how you claim. It may be that even if you would otherwise claim under the SME scheme, you’ll have to move a portion – or all – of your project costs to the RDEC scheme. Speak to your tax advisor for information on this.

Step 4: The calculation

It’s time to calculate the value of your claim. Let’s start with a profit-making SME (26%), assuming the qualifying expenditure is £100,000:

£100,000

x 130% enhancement = £130,000

x 19% Corporation Tax Rate = £24,700

Now let’s look at a loss-making SME (33.35%):

£100,000

X 130% enhancement = £130,000

Enhanced R&D = £230,000

£230,000 x 14.5% = £33,350

Finally, let’s look at a large company claiming under the RDEC scheme (12%), assuming the qualifying expenditure totals £250,000.

£250,000 spend x 12% enhancement rate = £30,000 above the line credit

£30,000 – 19% CT rate (in this case £5,700) = £24,300

The after-tax benefit in this example, then, is £24,300.

Making it simpler

Of course, there are easier ways to make the calculation than doing it manually. Using an R&D tax credit calculator is a simpler way of calculating the potential value of your claim. Remember, however, that these tools are designed to give you an accurate estimate of your claim value based on the numbers you input.

When filing your tax return and submitting the final R&D tax claim, you should always enlist the help of a tax specialist to ensure the figures are correct.

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