Research and development (R&D) tax credits have become an invaluable tax relief offered by the UK government to reward innovative British companies looking to push the boundaries. Whether you are looking to design and develop new products or services, or improve existing ones, it’s possible to receive a cash payment or a reduction on your Corporation Tax via R&D tax credits.
R&D tax credits pay out the equivalent of up to 33p for every £1 you spend on qualifying R&D within loss-making small businesses. Profitable companies can expect to claim back 25% of their R&D costs. This expenditure covers staff salaries, pensions and National Insurance contributions (NICs); the use of freelancers or subcontractors; the cost of consumables and materials as part of the R&D process; and outlay on essential software.
How are R&D tax credits paid out to businesses?
Businesses may claim for R&D tax relief up to two years beyond the end of the financial year it relates to. All claims are processed and reviewed thoroughly by HM Revenue and Customs (HMRC). There are several ways that R&D tax credit is paid to those who use the R&D tax credit scheme:
Direct cash rebates
If you are claiming for R&D tax relief for a financial year in which you have already paid out your Corporation Tax, your company tax return form for the corresponding year can be amended and HMRC will issue your business with a cash rebate.
If your business is loss-making following an R&D tax credit claim, it is possible to carry back the enhanced R&D losses to the previous financial year or carry it forward to be offset against potential profits in the next financial year. It can also be surrendered as group relief.
If you choose to make an R&D tax credit claim for the same year as your latest Corporation Tax return, you can choose to use your relief to reduce your Corporation Tax bill, providing your business is profitable.
For loss-making companies, it’s also possible to claim a cash credit from HMRC. This can only be transferred if you are prepared to surrender the enhanced losses of your R&D. This option is particularly beneficial for those with cash flow issues.
In the event taxable profits become loss-making as a consequence of R&D credit claims, it’s possible to use your relief in multiple ways. For example, you can somewhat reduce your company’s Corporation Tax, whilst carrying forward or back some of your R&D losses to offset as profits.