SME vs RDEC: What should you claim under?

SME vs RDEC: What should you claim under?

If you’re planning on making an application for Research and Development (R&D) Tax Credits, you need to know the differences between the two schemes available:

  • The Small-Medium Enterprise (SME) scheme
  • The Research and Development Enhanced Credit (RDEC) scheme

Depending on the size of your company the nature of the incentive you are qualified for could change, so it is important you understand the basics first.

 

What’s the deal with R&D?

Introduced during the turn of the millennia, the UK government announced its R&D tax credits scheme to encourage innovation and growth in UK businesses. It was also a good sign that support for companies, that would have otherwise struggled to keep up with R&D expenditure, was present.

So, if you’ve made a scientific advancement that has either innovated or refined a new/existing technology or product, you can claim back your R&D expenditure as tax relief which can be used to keep your business going and active within its sector.

The three most important tax benefits that can arise from successfully applying for R&D tax credits are:

  • Corporation Tax rebate
  • Payable tax credit
  • Enhanced deductions which can be carried forward

As mentioned above R&D work is considered to be a scientific advancement or refinement, but what HMRC consider to be R&D and what business owners think it is seemed to be two different things. To tackle this HMRC have made it very clear what they consider to be R&D work for tax purposes:

  • Attempting to overcome scientific or technological uncertainty
  • Making progress that is not easily achievable by industry professionals
  • Creating or modifying new/existing products or services

This of course also means tax relief is only available on expenses towards the R&D work such as staffing costs, consumables, subcontractor costs, robotic machinery costs and even software. As long as the expenditure was on a component that directly impacted the R&D project, you can claim for it.

It doesn’t matter if your R&D project failed either, as you still could make claims if you took some risk in making a scientific or technological advancement. HMRC consider if R&D activity was carried out, not just the outcome of the project.

What scheme do I qualify for?

To qualify as an SME your company headcount should be less than 500 and your turnover and balance sheet less than €100 million and €86 million respectively. But not all companies fit this mould, after all, you may have over 500 employees, but your turnover could be less than €100 million. Don’t get your head in a twist though, we’ve simplified it for you:

The SME scheme

As its name suggests, this R&D scheme is aimed towards SMEs and proposes incentives of great benefit to qualifying businesses.

Perhaps the most significant advantage of claiming under this scheme is that it allows profit-making companies to deduct 130% of eligible R&D expenditure from taxable profits – meaning that when added on top of their existing 100% deduction there is a massive 230% total tax deduction!

Loss-making companies don’t lose out either, as they can make claims worth up to 14.5% of their surrenderable loss to use as an immediate cash injection or set against future losses.

 

The RDEC scheme

Large companies with no Corporation Tax liability can also benefit from R&D tax credits, in the form of cash payments or tax reductions. Companies qualified for RDEC can claim back 13% of eligible R&D expenses, which is often big money when you consider the fact that the average RDEC claim is more than £500,000.

RDEC is also an option if your company has already received state aid, such as grants. You may remember recently during the G7 summit in Cornwall, the Prime Minister announced a multimillion-pound incentive for innovators involved with green energy solutions. Even if a small company were to benefit from this grant, they can also claim further tax relief – but only through the RDEC.

 

Get in touch with WIM Accountants today to help you with your R&D tax claim.

R&D Tax Credits in the Food and Drinks Industry

R&D Tax Credits in the Food and Drinks Industry

We all love food and beverages, even more so when there’s something new on the block. Luckily for those of us in the UK, the food and beverage industry is one of the largest (approximately £29bn contributing to the UK economy) so there is a huge investment in research and development to make products taste better, preserve for longer and have better nutritional content. The development process is not limited to just food and drink only, as advancements in manufacturing technology, marketing and even sourcing contribute to R&D activities in the food industry. 

What can I claim tax relief for?

There is a multitude of work done that may qualify for an R&D Tax Credits claim, such as:

  • Creating or developing new flavours or ingredients
  • Enhancing nutritional content
  • Improving taste or texture
  • Making new samples
  • Creating healthier alternatives
  • Developing more sustainable packaging and logistics
  • Thinking up of methods to reduce costs

Unfortunately, despite this list only listing a few of the large number of possible reasons to claim an R&D tax rebate in the food & drink industry, many business owners and individuals are not claiming and are missing out on crucial funding to improve their cash flow. An owner of an SME may want to take particular notice of this.

What types of expenditure qualifies for R&D Tax Credits?

Companies tend to spend a sizeable amount on improving existing/prospective products, refining processes and product lines, as well as additional expenses for packaging, marketing, salaries, ingredients etc. R&D Tax Credits can aid in mitigating these costs by up to 25% and help you continually develop your products further. 

How can I make a claim?

Claiming R&D Tax Credits isn’t easy with many areas of uncertainty. Don’t worry, our team of R&D tax advisors will assist you in constructing high quality, accurate claim that stands up to HMRC interrogation.

As long as a technological or scientific variable is being investigated during your project, usually involving financial risk, R&D Tax Credits are certain to follow. Firstly, we can help you identify all the relevant costs, and to adjust them correctly. We can then put together a detailed, appropriate case, and work on your behalf with HMRC as well.

Why not have a look at our R&D Tax Credits page for more information about how this highly valuable tax incentive could boost your food and beverage company. When you’re ready to make a claim, get in touch with us to get the process started.

R&D Tax Credits 2021: What’s new?

R&D Tax Credits 2021: What’s new?

Did you know that your R&D tax credit claim could be capped?

The Budget 2021 released on 3 March 2021 brought good news for those working with data and cloud-based computing, as it now looks increasingly likely that this will be included in the new scope of tax reliefs. However, what may come as a disappointment for those qualified under the SME or R&D expenditure credit (RDEC) schemes is that there was no increase to the available R&D tax relief. Instead, what SMEs did receive was confirmation that the planned SME cap will come into effect. Businesses that particularly rely on subcontractors to assist with R&D will want to know what changes the new rules will make on their funding.

 

Who will this affect?

You should be aware of these changes if you are:

  • An SME with no or low payroll expenses
  • Planning to claim an R&D tax credit exceeding £20,000
  • Subcontracting R&D work
  • Managing international Intellectual Property (IP)
  • Recharging personnel costs between group parties

 

Why are there changes?

The tax relief is a useful support for companies operating at a loss, with a tax credit worth up to 14.5% of the R&D element of surrendered losses available to claim. Unfortunately, increasing signs of the tax credit being used for fraud and abuse has prompted HMRC to put this measure in place. Perhaps a high-profile example of such fraud is the £29.5m R&D tax relief claim put forward by Convergica (Clinical Information Systems) Ltd, which subsequently prompted a HMRC investigation which jailed three men after 2 years of investigation. This is a sophisticated matter and sadly legitimate businesses can get caught in the anti-fraud net HMRC have cast, so it is important that as an SME, you understand the new rules put in place.

 

The new SME Cap

From 1 April 2021 the SME cap on available credit was set at £20,000 plus 300% of the total PAYE and NIC liability of the company in the interests of preventing abuse. HMRC have also introduced amendments to this legislation in order to ease its introduction:

 

“Where a company has an accounting period that straddles 1 April 2021, the measure does not apply to the part of the period from 1 April, but instead, only affects the next full period starting after that date.”

 

Therefore, a current accounting period is not subject to the new SME cap.

Exemptions for your claim do exist provided that your company meets both of the following criteria:

  • Your employees are creating, preparing to create or managing Intellectual Property (IP). IP refers to intangible creations, such as copyrights, trademarks, trade secrets and patents.
  • Your company does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPW) by, connected persons.

 

How will this affect my business?

As a business with an R&D venture you may want to receive tax credit funding in order to improve your cash flow, as you may receive trading profits and funding is typically reinvested for future projects that also meet the criteria for an R&D tax claim. The idea is that your one innovation paves the way for more future innovations, yet the cap instead risks disrupting cash flow by introducing uncertainty and obstacles for your business.

Fresh businesses looking to explore R&D further will need the tax credit as a way to secure essential cash injection to help them power through the use of external resources and tax losses when they start out. R&D is high cost and high risk, but the cap has the potential to delay this cash injection.

 

How does a subcontractor affect my claim?

As an SME involved in R&D activities, you can claim 65% of the costs paid to a subcontractor for qualifying activities. Similarly, companies under the RDEC scheme can claim the same amount provided that the subcontractor is an individual, a partnership of individuals or a qualifying body. The finer details on what qualifies as subcontracted work is quite broad, as your subcontractor does not need to be UK resident, nor does the work they carry out need to be done in the UK. Furthermore, there is no issue if the work your subcontractor carries it is not inherently R&D if viewed at in a vacuum so long as it contributes to your own R&D work.

 

But what if my subcontractor and I are connected parties?

If you are connected to the subcontractor, for example having a mutual shareholder, your claim for R&D tax credit is different. The amount you can claim can actually be more or less than the 65% available for non-connected parties, but the actual amount itself tends to be reliant on the actual costs involved with the claim and R&D project. The claim will also be for the lesser of the R&D payment and expenditure made to the subcontractor.

 

I think I am affected, what do I do now?

HMRC are strict and resolute in their application of rules and regulations, so if you are affected by the cap you need to take appropriate steps to make sure you aren’t unfairly caught out.

You should review any previous claims and see if the new cap would apply in those circumstances. If you have: subcontracted work domestically or internationally; have staff on low or no salaries; or if your business is new, you will likely qualify under the new cap. We’ve seen how strict HMRC can be and issued enquiries and penalties can be hard to recover from, so you need to have effective planning to mitigate the potential impact of the cap, which is what we can help you with.

HMRC are holding an open consultation which will run until 2 June 2021, with stakeholders being a primary target for thoughts.

WIM Accountants have a thorough understanding and great experience in dealing with R&D tax credit schemes. We offer top class advice and an R&D tax relief service, so you can relax knowing that we will make sure your claim is properly done and will get you the maximum claim you can get. If you have are still unsure about how this change affects you, or want to know more, get in touch at info@wimaccountants.com.

WIM Accountants are here to help businesses with their accounting and taxation needs.

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