Sample Calculations of an R&D Tax Credit Claim for Small Business

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The R&D tax relief scheme for companies in the UK is meant to encourage innovation across all sectors. Businesses can get a significant amount of benefit by making a claim. Unfortunately, some organisations are still missing out. There is a common misconception that the guidelines are too complicated to navigate. The fact is, HMRC has published a guide to help companies identify their eligibility for the scheme. In addition to this, there are several services offering expert assistance in the filing of R&D tax credit claims. With these options, there is truly no reason why companies should miss out.
 
The computation of tax relief that will be extended to an organisation depends on which category the business falls under:

• Profit-making
• Loss-making
• Large companies that fall under RDEC

Once identified, the business can then proceed with determining expenses and activities that can be included in the claim. To illustrate how beneficial the scheme is, here are some sample calculations depending on each category.
 
Sample calculation for profit-making small business and loss-making small business

On average, a profitable small business may benefit from a saving of up to 25%. This will be applied against corporate tax obligations. Here is an R&D tax credit claim example:

•  £100,000 qualifying R&D expenses
• Multiply this by the enhanced deduction 130% = £130,000
• Multiply by corporate tax rate of 19% = £24,700
• That’s 25% of the expenditure saved

In contrast, here is what it looks like if the business is loss-making:

• £100,000 qualifying R&D expenses
• Multiply this by the enhanced deduction 130% = £130,000
• Enhanced R&D = £230,000
• £230,000 x 14.5% = £33,350
• Claim up to 33% of R&D expenses

While the computation for tax relief clearly looks more profitable for small businesses, large companies can also benefit from the RDEC scheme. Both profit-making and loss-making large companies have the potential of receiving a 9.7% credit against their research and development expenses. As an example, if the expenditure was a total of £100,000, the company can get a potential tax credit of £9,700.
 
These sample calculations do give an insight into how much a company can benefit from filing a claim. Clearly, there are many companies that are already engaging in research and development but continuously miss out on getting the benefit of tax relief. The amounts illustrated above, especially for small businesses are clearly profitable and worth the time to consider.
 
How to get the maximum benefits of R&D tax relief

In order to get the maximum benefit, a company that has undertaken research and development activities within the year should be able to identify every single expense related to the project. This can be time-consuming, which is why it is beneficial to hire specialists that can work with the business every step of the way.