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What is R&D Tax relief? Who is it for?

What is R&D Tax relief, who is it for?

R&D stands for Research and Development (R&D). There are two R&D  tax relief schemes currently available to creative businesses.

Most creatives will be interested in the scheme for small and medium-sized businesses (SMEs).

R&D for SME’s

This is a scheme put in place by the government to support companies who invest time and money into developing new products and services. The aim is to boost innovation in the UK. If you think you are working on innovative projects then this R&D tax relief could be for you! Plenty of creative businesses make successful claims, from architects and product designers to tech companies, so don’t count yourself out.

The basic benefit is that any money the company spends on qualifying R&D expenditure, HMRC will give a tax deduction of 230% of that spend, so an additional 130%.

A very basic example would be:

The total costs in the business are £500k, of that, £100k is found to be qualifying R&D expenditure.

The R&D claim would be £100,000 * 230% = £230,000

How can R&D credit help your creative business?

R&D credit can help a business in two ways.

Firstly  – if you are profitable and pay corporation tax – the credit will reduce the taxable profit and so save the company corporation tax.

Say the company had taxable profits for the year of £200,000 it would usually expect to pay 19% corporation tax on that profit of £38,000

However, if it applied the R&D expense deduction (calculated above) the profit would fall to £70,000, and the corporation tax due would fall; £13,300 (£70,000 x 19%), a tax saving of £24,700.

The second benefit is available if the company makes a loss. Let’s assume the same business had only made a profit of £50,000, not the £200,000 noted above. Once you apply the R&D tax deduction of £130,000 the company is making a loss of £80,000. Not only does this result in the company paying no corporation tax at all for that period but the loss can be used to get a cash payment back from HMRC.

The cash payout is based on 14.5% of the lower of:

The qualifying R&D expenditure multiplied by 230% (in our example this figure is £230,000)

Or the trading losses (in our example the company has a loss of £80,000)

So the lower of the amounts is the £80,000.  14.5% of that value is £11,600.

As a result of the R&D claim in this period the company pays no corporation tax and gets cash paid of £11,600 from HMRC.

Rules and Criteria for an R&D Tax Credit

As with any tax relief or credit, there are detailed rules and qualifying criteria so you may need to speak to an accountant to get some assistance (we can of course help with this, feel free to get in touch).  If you think you have a project which may fall into this scheme then it’s well worth paying someone like us to help you. We are happy to look at possible projects if you are unsure, but you can start by looking here: What qualifies as an R&D project?

NB: The Government has announced that, for accounting periods beginning on or after 1 April 2021, the amount of the payable credit will be restricted by reference to the company’s total PAYE and NI bill for the period.

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