What are R&D Tax Credits and Why Provide Them?
Research and development (R&D) tax credits were created by the government in 2000 as a form of corporation tax relief available to limited companies.
Their purpose is to reward past R&D efforts and incentivise continued development work. By offering the relief the government seeks to foster a culture of innovation which in turn should promote economic growth.
Since their inception R&D tax credits have continued to get more and more generous. They work by rewarding qualifying companies with a substantial cash repayment or corporation tax deduction.
At the time of writing this article, a small or medium size company (SME) can receive up to 33.3p for every £1 spent on development activities, and a large company can receive up to 9.7p for every £1. This can translate into a significant cash payment to the claimant. This is illustrated by the Government’s latest published statistics, stating that the average cash benefit obtained from a small and medium size enterprise (SME) claim is circa. £62,000. The average value for a large company is circa. £349,000.
£62,000
Average SME Claim
£349,000
Average Large Company Claim
Once received, the claimant company is free to spend the money as they wish – there are no restrictions. Unlike other forms of investment such as a bank loan or equity, the cash does not need to be repaid nor do you have to give up any equity stake in your company. It is free cash.
As R&D tax credits are a form of corporation tax relief, they are only available to limited companies. The claim is made as part of your corporation tax return. This means that you are able to go back and make claims retrospectively. As you have two years from the end of your accounting period in which to amend your corporation tax return, by implication you have two years from the end of the period to make your R&D tax credit claim. As a result, most companies who are new to the relief tend to claim for two accounting periods together – making that first claim even more worthwhile.
Just to dispel a common myth, you do not need to be profitable to make a claim. Often we hear companies say that they cannot make a claim as they haven’t made a profit yet – this is simply untrue. A loss making company can still make a claim and receive a cash payment from HMRC.
Given the huge financial rewards on offer it is recommended that every company considers if they could be eligible for the relief. The LimeLight Campaign will be sharing valuable insights over the coming weeks which will help, but we always recommend speaking to a chartered R&D tax credit specialist if you are in doubt.
Statistic source: HMRC R&D Tax Credit Statistics Report 2017.
