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NewslettersHow to calculate research and development R&D tax relief for SMEs
Calculating R&D tax relief for small and medium-sized businesses (SMEs) can be a complex process, but it is an important one for companies looking to invest in research and development. The relief is calculated as a percentage of the qualifying R&D expenditure, which is the amount spent on eligible R&D projects. The percentage varies depending on whether the company is an SME or a larger enterprise.
What is R&D tax relief?
R&D tax relief is a government scheme designed to encourage and support businesses to invest in research and development activities. The relief allows companies to claim back a percentage of the costs incurred on eligible R&D projects, which can be used to offset profits and reduce the overall corporation tax liability.
What is an R&D project?
An R&D project is an activity that seeks to achieve an advance in science or technology. The project must be systematic, investigative and experimental and aim to resolve scientific or technological uncertainty. R&D projects can be undertaken in a wide range of industries, including manufacturing, engineering, software development, and biotechnology.
Is my small business eligible for R&D tax relief?
To be eligible for R&D tax relief, a business must be a trading company or a partnership of trading companies. The R&D activities must be carried out in the United Kingdom and must be part of the company's trade. The company must also be liable to pay corporation tax.
R&D tax relief for profitable companies
SMEs can claim a tax credit of 230% of their qualifying R&D expenditure, while larger companies can claim a tax credit of 130%. In addition, SMEs that are profitable can also claim a cash credit, which is a payable tax credit equal to 14.5% of the surrenderable loss.
How does the SME R&D scheme work?
The SME R&D scheme allows companies to claim a percentage of the costs incurred on eligible R&D projects. The claim is made through the company's corporation tax return, and the relief is given as a reduction in the company's corporation tax liability.
What R&D costs can SMEs claim?
SMEs can claim a wide range of costs associated with their R&D projects, including staff costs, consumable materials and utilities, software, and subcontractor costs. In addition, the costs of clinical trials and certain types of externally provided workers can also be claimed.
How do you claim SME R&D tax credits?
To claim SME R&D tax credits, a company must first identify and document the R&D projects it has undertaken. The company should then calculate the qualifying R&D expenditure and claim its corporation tax return. It is crucial to keep accurate records and retain supporting evidence, such as invoices and receipts, to back up the claim.
Supporting your claim
To support your claim, keeping accurate records and retaining supporting evidence such as invoices, receipts, and contracts is essential. You should also be able to demonstrate that the R&D project sought to achieve an advance in science or technology and that it aimed to resolve scientific or technological uncertainty.
What are other tax reliefs available for small businesses?
- Allowance (AIA), which allows businesses to claim 100% tax relief on the cost of certain capital equipment up to a limit of £1,000,000 per year. Other reliefs include the Patent Box, which allows companies to apply a lower rate of corporation tax to profits earned from patented inventions, and the Seed Enterprise Investment Scheme (SEIS), which provides tax relief for individuals who invest in qualifying early-stage companies.
- The Employment Allowance is a UK government scheme that allows eligible employers to reduce their National Insurance contributions (NICs) by up to £4,000 per year. The allowance is intended to help small businesses and charities by reducing their employment costs.
- The Seed Enterprise Investment Scheme (SEIS) is a UK government scheme that provides tax relief to individuals who invest in small, early-stage companies. The scheme is intended to help new businesses raise capital by making it more attractive for individuals to invest in them. Investors can claim back 50% of the amount invested, up to a maximum of £100,000 per tax year, in addition to other tax reliefs.
- Creative Industries Tax Relief is a set of UK government tax reliefs that are intended to support the creative industries, including film, television, animation, video games, and theatre productions. The reliefs are designed to encourage investment in the creative industries by providing tax incentives for companies and individuals who invest in qualifying projects. The tax reliefs include corporation tax relief and reliefs for investors and individual artists.
Conclusion
To claim SME R&D tax credits, a company must first identify and document the R&D
R&D tax relief is essential for small and medium-sized businesses looking to invest in research and development. The relief allows companies to claim back a percentage of the costs incurred on eligible R&D projects, which can be used to offset profits and reduce the corporation's overall tax liability. Businesses need to understand the eligibility criteria and keep accurate records to support their claim. Additionally, it is worth exploring other tax reliefs available to small businesses, such as AIA, Patent Box and SEIS.
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