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Tax Tip

How does R&D tax relief work?

 Stuart Coleman, Manager of the Tax Department of ABDS explains:

“R&D tax relief and tax credits are still among the most under-claimed tax incentives currently available.
 
HM Revenue and Customs (HMRC) will allow an extra 125% (30% for large companies) of identified costs to be written off against taxable profits. Therefore if R&D expenditure of £100,000 is identified, HMRC will allow £225,000 to be included in the tax computation, giving an extra £125,000 of cost to be offset against taxable profits. The current Corporation Tax rate is circa 20% which equates to a £25,000 reduction in a tax liability. 
 
However, loss making companies are not excluded from the benefits and tax credits can be claimed on the losses enhanced by the R&D expenditure instead of carrying the losses forward to offset against future profits. 
 
To give you an example, if the R&D expenditure is £100,000, HMRC will pretend that a company has spent £225,000 as described above. If a company is loss making, HMRC will allow a company to surrender those £225,000 of losses for a cash payment of up to 14.5% which equates to £32,625. 
 
Essentially loss making companies can claim up to 32.63p in every pound spent on qualifying R&D.
 
The expenditures allowed as part of the claim fall into four key categories: staff costs, consumables, subcontract labour and heat and power costs.
 
R&D does not have to be ‘blue sky’ innovation or consist of creating new technologies. Instead, appreciable improvements to existing technology which would be regarded to be ‘difficult’ by those considered competent in the field are perfectly acceptable where the R&D legislation is concerned. 
 
Retrospective claims can be made for the past two accounting periods which can often result in a significant repayment of corporation tax, or if a company is loss making, a claim for R&D tax credits. It is therefore important to discover whether a claim can be made as soon as possible so as not to miss out due to time limits.
 
If you are not sure, or would like advice and assistance, contact the Tax Team at ABDS now.
 
ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900 E-mail: abds@netaccountants.net
 
Brilliant with numbers  
Great with people  
Clear and precise with advice
Timely and cost effective
In touch with issues that face our clients
Mindful of our client’s long term strategic goals
 
Helping Your Business is Our Business
 

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