Research and development (R&D) tax credits scheme
The UK’s R&D tax credit regime is one of the most attractive in the world. Since its inception in 2000, the R&D tax relief scheme has had a significant impact on businesses engaging in innovative projects. The government’s ongoing drive to encourage businesses to invest in R&D has resulted in increased rates of tax relief available to UK companies, with the repayable credit under the SME scheme now standing at 14.5%.
The scheme gives higher rates of corporation tax relief on allowable R&D costs. SME companies can deduct an additional 130% of qualifying costs from their taxable profits, giving a reduction in their corporation tax liability. Loss-making companies can surrender their R&D losses for a 14.5% repayable credit which can offer a lifeline to early-stage businesses.
For example, a profitable company investing £100,000 in qualifying R&D activities can obtain a £230,000 tax deduction, resulting in a reduction in the corporation tax liability of £24,700. If instead the company is loss-making, it can surrender the R&D losses for the tax credit available. This would generate a repayment of £33,350 which is an effective 33.35% subsidy on their R&D qualifying spend.
For accounting periods beginning on or after 1 April 2020, a cap of 300% of the company’s total PAYE and NIC costs is expected to apply to the amount of repayable credit that can be claimed. This will predominantly affect companies who subcontract their R&D, as they do not have permanent employees.
From 1 July 2016, companies claiming more than €500,000 of relief per annum under the SME scheme have their details published on the European Commission website.