Tax Credits Explained

Tax Credits Explained

Rewarding innovation and fuelling growth, R&D tax credits can transform your business. Research and development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation. They are a valuable source of cash for businesses and the cash can be used in any way the business decides. Having the ability to make a claim every year can allow a business to invest in accelerating their R&D, hire new staff and ultimately grow their business to the next level.

Companies that spend money developing new products, processes or services; or enhancing existing ones, are eligible for R&D tax relief. If you’re spending money on any projects that meet the qualification criteria, you can make an R&D tax credit claim to receive either a cash payment and/or Corporation Tax reduction. The scope for identifying R&D is huge – in fact, it exists in every single sector. And if you’re making a claim for the first time, you can typically claim R&D tax relief for your last two completed accounting periods.
Is my business eligible for R&D tax credits?
To benefit from R&D tax incentives, you must:

  • Be a limited company in the UK that is subject to Corporation Tax.
  • Have carried out qualifying projects.
  • Have spent money on these projects

The HMRC R&D criteria are purposefully broad. Whatever size or sector, if your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you may be carrying out qualifying activity. This could include:

  • Previous marketing or branding awareness plans.
  • Previous CRM or e-commerce improvement plans.
  • Previous improvements to any internal software processes, or hardware improvements.
  • Previous or future production improvements.
  • Manufacturing improvements or product development.
  • Improvements to your supply chain.
  • Improvements to your stock control system.
  • Improvements to your commercial premises to enable further process improvements.
  • Hardware purchases relating to a process or production improvement.
  • Innovative methods of construction.
  • Innovative ideas on ground works, such as flood control.
  • Innovative ideas on environmental improvements.
  • Innovative ideas on patient or child care, such as Care Homes and Nurseries.
  • Innovative ideas on saving materials and reducing waste.

What scheme you use to make an R&D tax credit claim will largely depend on whether you are an SME or a large company.

SME:
Fewer than 500 staff and either not more than €100 million turnover or €86 million gross assets. Most companies, including start-ups, fall into this category.

Large company:
500 staff or more and either more than €100 million turnover or €86 million gross assets.

If you are classed as an SME for R&D tax credit purposes, your next step will be to make a claim via the SME R&D tax credit scheme. And if you are a large company, via the Research and Development Expenditure Credit (RDEC).

ZLX assists SMEs across all sectors to receive millions of pounds every month and if they so desire re-invest these funds back into their businesses. It is possible to make use of R&D tax credits and grant funding together by using both schemes to ensure maximum value.

R&D tax credits are calculated based on your R&D spend. To make an R&D credit calculation, you need to identify qualifying expenditure and enhance it by the relevant rate (see below). This produces your ‘enhanced expenditure’.

When you deduct your enhanced expenditure from your taxable profits, or add it to your loss, it will result in:

A corporation tax rebate or a cash credit.

SMEs are able to claim up to 33p for every £1 spent on qualifying R&D activities. The average claim made by SMEs in the UK is £54,846 (2017-18).

This is only one claim per financial year. Given that you can go back two accounting periods then this figure is double.

Large companies are able to claim up to 12p for every £1 spent on qualifying R&D activities. The average claim made by large companies in the UK is £543,881 (2017-18).

The R&D tax credit rates 2018 are show in the table below.

Rates by incentive:
Who you are: SME R&D tax credit scheme RDEC
A loss-making SME Up to 33% 12%
A profit-making SME Up to 25% 12%
Large company n/a 12%

The ZLX technical approach to research and development (R&D) tax credit claims delivers maximum returns on your R&D tax credit claim.

We’ve developed a process that is robust and adaptable, tailored to your needs whatever your size, sector or structure. It’s an approach that provides maximum value and minimal risk.

What we offer our clients is much more than a rigorous process. By making ZLX your preferred partner to making a claim, you benefit from the specialist technical expertise of an outstanding team.

ZLX has developed a brilliant approach to large company R&D tax credit claims. We tailor our specific RDEC service to your company’s needs, drawing on our specialist technical experts to deliver maximum value.

Regardless of the size and complexity of your company, our approach is robust and will withstand close scrutiny from HMRC.

The definition of a large company for R&D tax credits depends on three criteria: headcount, turnover and gross assets.

If you employ 500 staff or more and have either a turnover of more than €100 million or €86 million in gross assets, you are classed as a large company for the purposes of R&D tax incentives.

These figures include your worldwide headcount and turnover and assets. And if your company is part of a group, then these figures apply for your whole group.

The R&D tax incentive for large companies is called the Research and Development Expenditure Credit (RDEC). It was first introduced on 1 April 2013.

The definition of a large company for R&D tax credits depends on three criteria: headcount, turnover and gross assets.

If you employ 500 staff or more and have either a turnover of more than €100 million or €86 million in gross assets, you are classed as a large company for the purposes of R&D tax incentives.

These figures include your worldwide headcount and turnover and assets. And if your company is part of a group, then these figures apply for your whole group.

The R&D tax incentive for large companies is called the Research and Development Expenditure Credit (RDEC). It was first introduced on 1 April 2013.

RDEC allows the benefit of R&D to be accounted for within the Profit and Loss (P&L) account, above profit before tax, rather than only through the tax account. So, under the RDEC scheme, large companies who are loss making are now able to benefit from their development efforts for the first time, by way of an immediate net of tax cash credit, which is tax exempt.

The RDEC also enhances the company’s earnings before interest and taxes (EBIT), therefore ends up being more lucrative for larger companies. The scheme is now a straightforward subsidy against the level of R&D spend that your company incurs. Our one and only goal is to get you the maximum benefit you deserve for innovating in the UK.

We don’t start with your balance sheet. We start by walking the floors and understanding the things you do and the things you make.
There is no conflict of interest. As this is all we do our advice will never conflict with other tax or audit advice you receive.

You are paying for our expertise (not to support a large corporate infrastructure). Experience tells us that when other firms prepare a claim that they leave some of the value off the table. Even the biggest names.

On average, we see an uplift of 200% over what companies have claimed themselves or using another adviser.

RDEC is a valuable tax incentive for large companies. It can have a major impact on a large firm that spends money on R&D each year.

  • Large companies can claim back up to 12p for every pound spent on R&D – even if they are loss-making.
  • The average RDEC claim made by large companies in the UK is £680,109.

At ZLX, our mission is to maximise the impact of R&D tax incentives for UK businesses. This means ensuring that large companies who have been claiming RDEC for a number of years are identifying the full scope of qualifying expenditure.

Our approach is to check every detail of the projects completed or ongoing to discover the maximum qualifying costs that others may have missed so the business can reap maximum reward.

RDEC rate

Large companies benefit from an RDEC rate of 13%. The R&D expenditure credit you receive is taxable at the normal Corporation Tax (19%) rate. This means the net benefit is worth almost 12p for every £1 you spend on qualifying R&D. Since its introduction, the government has gradually increased the percentage of the RDEC incentive.

RDEC calculation example

The following example shows what you can expect your large company R&D relief to be worth if you spend £10,000,000 on qualifying R&D

£10,000,000 x 13% = £1,300,000 (above-the-line credit)

-19% (Corporation Tax rate) = £1,053,000 (after tax benefit)

£1,053,000 / £10,000,000 = 10% return on investment