How to calculate Research and Development R&D tax relief for SMEs

Research and development makes a vital contribution to the success and development of your business, but it can also provide you with significant savings on your Corporation Tax bill.

In our earlier article, a guide to research and development accounting, we explained the categories of expenditure you could claim as allowable expenses against Corporation Tax.

In this article, we set out an example of the calculations you need to make to find out how much you have saved on your tax bill. The savings apply to both profitable and loss-making companies and we have included examples for each.

According to HMRC guidelines, you can claim SME R&D relief if you’re a small or medium business with less than 500 staff and a turnover under 100 million euros or a balance sheet total under 86 million euros.

SME R&D relief allows your company to deduct an extra 130 percent of your qualifying R&D costs from your yearly profit, as well as the normal 100 percent deduction, making a total 230 percent deduction.

You can also claim a tax credit if your company is making a loss and that is worth up to 14.5 percent of the surrenderable loss.

R&D tax relief for profitable companies

In this simplified example, we assume your business has a turnover of £10,000 with allowable business expenditure of £5000 and allowable R&D expenditure of £1000.

Your gross profit for tax is £4000. At a Corporation Tax rate of 19 percent your bill would be £760.

Deducting an extra 130 percent of your qualifying R&D costs reduces your gross profit to £2700.

At a Corporation Tax rate of 19 percent your bill would be reduced to £513 – a saving of £247.

Here’s how it looks in a worked example.

R&D tax relief for loss-making companies

In this simplified example, we assume your business has a turnover of £10,000 but makes a loss of £12,000, which includes allowable R&D expenditure of £1000.

No Corporation Tax is due because of the loss.

Deducting an extra 130 percent of your qualifying R&D costs increases your loss to £13,300.

You can carry the loss of £13,000 forward to offset against taxable profits in future years.

Or you can surrender your enhanced R&D expenditure of £2300 (230 percent of £1000) for a maximum tax credit of 14.5 percent of the expenditure of £2300 - £333.

Here’s how it looks in a worked example.

Other scenarios

As the article A guide to research and development accounting explains, the rules vary if your R&D project involves a third party.

If your business carries out research for, or with, a third party, a number of accounting rules apply to the transactions between the two parties. For example, you might handle research for a sponsor in return for a fee or a share of future royalties.

There are also special rules that apply if your business is involved in a merger or takeover and your R&D costs are treated as goodwill by the acquiring business.

The calculations become more complex if your business is part of a group or if you are carrying out qualifying R&D as a subcontractor. In scenarios like this, it can be useful to take professional advice to find out which approach is most beneficial to your business.

Support from Accounts and Legal

This is a brief outline of the requirements for calculating R&D tax relief. If you would like to discuss the tax implications for your R&D project, our team of experienced small business accountants will be glad to help. To find out more, please contact us on 0207 043 4000  or info@accountsandlegal.co.uk. You can also get a free online accountancy quote to get an idea of how much our accounting services will cost.