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Research and Development Tax Credits

For every £100 of qualifying costs, your company can reduce its corporation tax by an additional £125 on top of the £100 spent.

 

Research and development (R&D) tax relief is intended to drive UK productivity by encouraging innovation.

R&D tax credits and relief are available to businesses for expenditure of a revenue nature (that is, expensed through the profit and loss account) on R&D activities related to a company’s trade.

 

Subject to the detailed rules, this can include expenditure on:

  • Staff costs (i.e. salaries etc.)
  • Consumable items (i.e. materials or equipment consumed during the R&D process),
  • Software used in the R&D, and
  • Payments to externally provided workers/sub-contractors carrying out R&D for the business.

 

Rate of Tax Relief or Credit

  • The tax relief on allowable R&D costs incurred after 1 April 2012 is 225%.
  • For every £100 of qualifying costs, your company can reduce its corporation tax by an additional £125 on top of the £100 spent.
  • If there is a taxable loss for the period, this can be increased by 125% of the qualifying R&D costs.

 

This loss can be carried forward in the normal way and offset against future taxable profits or can be converted to tax credits payable to the company by HMRC.

 

Illustration 1

R&D Relief for expenditure of £20,000 where the company has made a profit of £30,000:


Calculation Step

Amount

R&D Expenditure

£20,000

R&D Relief

£20,000 x 125% = £25,000

Normal taxable profits

£30,000

Taxable profit less R&D relief

£30,000 - £25,000 = £5,000

Revised taxable profits

£5,000

 

Illustration 2

If your company makes a loss, the company can choose to receive the tax relief by way of tax credits – a cash sum paid to the company by HMRC.Converting R&D Relief on expenditure of £20,000 to a tax credit payment:


Calculation Step

Amount

R&D Expenditure

£20,000

R&D Enhancement

£20,000 x 125% = £25,000

Normal taxable profit

£5,000

Trading loss (after R&D Relief)

(£20,000)

R&D Expenditure qualifying for conversion to credits

£20,000

Potential Tax Credit

£20,000 x 11% = £2,200

Payable tax credit

£2,200

 

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