The R&D tax credit returns between 10.53% and 33.35% of your qualifying R&D expenditure. This article is a step-by-step guide to estimating where your own R&D tax credit falls within that range.
How much you can claim depends on four factors:
- Which of your business activities count as R&D
- Which costs you associate with your R&D
- Which scheme you apply through
- Your firm’s financial position
In this guide, we’ll run through each of these factors, with a particular focus on the financial position calculations which we don’t cover elsewhere in our resources.
Which business activities count as R&D?
In brief, if you’re using skilled employees like engineers, scientists or skilled artisans to create or modify products, services or production processes then those activities will likely qualify for the R&D relief.
There are additional factors such as whether your work contributes to an advance in science or technology, and whether you are resolving uncertainty. We cover these in more depth in our guide to eligibility.
While some of your skilled professionals’ time will be taken up with R&D, some will also likely be for more mundane business-as-usual activity. You’ll need to separate out the R&D work from their BAU work.
Which costs you associate with your R&D
Over 90% of the costs we claim for are in three areas: staff costs, consumables and subcontractors.
Consumables are the physical materials, hardware and resources used up by the R&D. The most common examples are fuel, power, water and chemicals.
Staff are those employees engaged in the R&D while being on your payroll, whereas subcontractors will typically charge by invoice, and aren’t enrolled on your payroll.
For a more complete breakdown of the costs you can claim, consult our guide to qualifying costs.
Which scheme you apply through
There are two R&D tax credit schemes: the RDEC and SME schemes. The RDEC scheme returns 13% gross and 10.53% net of your qualifying R&D expenditure. The SME scheme returns up to 33.35%, and the credit is not subject to corporation tax.
The main reason businesses need to claim through the RDEC scheme is their size.
The company size test
If your business has fewer than 500 staff, and a turnover of under €100m or a balance sheet total under €86m, then you can likely claim through the SME scheme. If your company exceeds those limits then you should claim using the RDEC scheme.
Note that the limits are in euros because the HMRC rules were adapted from European-wide rules.
Other RDEC applicants
If your business received a grant, is conducting R&D as a subcontractor, or is part-owned by a larger company, then you may need to apply through the RDEC scheme. More details of these conditions can be found in our guide to scheme eligibility.
Your firm’s financial position
If you claim through the SME scheme, then the amount you receive back is affected by your firm’s financial position.
If you’re breaking-even then you will receive the minimum amount available through the SME scheme: 18.85% of your R&D expenditure.
If you’re profit-making, you can receive up to 25% credit back from your R&D expenditure. If you’re loss-making you can receive up to 33.35%.
The more profit you make, the greater your credit will be (up to the 25% maximum). Similarly the greater your firm’s loss, the more credit you will receive (up to 33.35%).
Your R&D credit as a break-even company
For all SME claims, HMRC enhances your R&D expenditure up to 130% of its value. So if your business spent £100k on R&D, then the enhanced R&D expenditure would total £130k.
When you break even, your enhanced R&D expenditure has a rate of relief of 14.5% applied. So break-even companies, therefore, receive 18.85% of their R&D expenditure.
Your R&D credit as a loss-making company
As a loss-making company your R&D credit is calculated from the combination of your enhanced R&D expenditure and your trading loss, with the same 14.5% rate applied. For that reason, the greater your loss, the more R&D credit you will be due as a % of your R&D expenditure.
Your total credit is then capped at 33.35% of your R&D expenditure.
Loss-making calculation 1
With a £50k loss and £100k of R&D expenditure, you would be credited with £26,100 or 26.1% of your R&D expenditure.
Financial position
Trading loss: £50,000
R&D expenditure: £100,000
Calculation
R&D enhancement: £100,000 x 130% = £130,000
Combined R&D enhancement and trading loss: £50,000 + £130,000 = £180,000
Credit: £180,000 x 14.5% = £26,100
Result
£26,100 paid out as a credit from HMRC. 26.1% of your R&D expenditure.
Loss-making calculation 2
With a £200k loss and £100k of R&D expenditure, you would be credited with £33,350 or 33.35% of your R&D expenditure, with the cap applied.
Financial position
Trading loss: £200,000
R&D expenditure: £100,000
Calculation
R&D enhancement: £100,000 x 130% = £130,000
Combined R&D enhancement and trading loss: £130,000 + £200,000 = £330,000
Credit: £330,000 x 14.5% = £48,285
Cap applied to R&D expenditure: £100,000 x 33.35% = £33,350
Result
£33,350 paid out as a credit from HMRC. 33.35% of your R&D expenditure.
Your R&D credit as profit-making company
When profit-making, HMRC deducts the value of your enhanced R&D expenditure from your taxable profit. The value of your R&D tax credit is therefore the difference between your corporation tax bill, before and after the R&D credit is applied.
Where the enhanced R&D expenditure is greater than your taxable profit, then the enhanced R&D expenditure becomes a trading loss and a loss-making calculation applies. This is shown in calculation 2 below.
The minimum you’ll receive is 18.85% (the break-even rate), and the maximum cap for profitable companies is set at 25%.
Profit-making calculation 1
With a £400k profit and £200k of R&D expenditure, you would receive a £49,400 credit or 24.7% of your R&D expenditure.
Financial position
R&D expenditure: £200,000
Profit: £400,000
Corporation Tax (19%): £400,000 x 19% = £76,000
R&D credit calculation
Enhanced R&D expenditure: £200,000 x 130% = £260,000
New taxable profit: £400,000 – £260,000 = £140,000
New corporation tax (19%): £140,000 x 19% = £26,600
Tax saving
Previous corporation tax bill: £76,000
Reduced corporation tax bill: £26,600
Total tax saving: £49,400
Result
£49,400 either as tax deduction or overpayment credit. 24.7% of your R&D expenditure.
Profit-making calculation 2
With a £20k profit and £200k of R&D expenditure, you would receive a £38,600 credit or 19.3% of your R&D expenditure.
Financial position
R&D expenditure: £200,000
Profit: £20,000
Corporation Tax (19%): £20,000 x 19% = £3,800
R&D credit calculation
Enhanced R&D expenditure: £200,000 x 130% = £260,000
New taxable profit: £20,000 – £260,000 = -£240,000
Tax saving
Previous corporation tax bill: £3,800
Reduced corporation tax bill: £0
CT saving: £3,800 (either as tax reduction, or as overpayment credit)
Additional tax credit returned
Credit calculation: £240,000 x 14.5% = £34,800
Result
Combined CT saving and credit: £3,800 + £34,800
Total: £38,600 or 19.3% of the R&D expenditure.