Carrying out research and development (R&D) can be an expensive part of developing your product/service and growing your business. So, finding a way to claim back tax against your R&D costs is a sensible way to reduce your costs and free up more cash for growth investment.
Expenditure on your R&D can be claimed against tax at a rate of up to 230% of the actual costs for small to medium-sized enterprises (SMEs). If your company is loss-making (and therefore has no tax liability) then a payable tax credit can be claimed.
Is my company eligible for the relief?
To be eligible for the R&D tax relief for SMEs, your company must have:
- Less than 500 employees, and either
- Turnover below EUR100 million, or
- Assets below EUR86 million.
Where you have qualifying expenditure that’s been incurred on R&D projects, allowable costs are increased by an additional 130% for tax purposes. So, for every £100 spent, £230 can be deducted from your profits when calculating tax – a helpful relief against your tax costs.
How does the relief work?
So, how does the R&D tax relief work in practice?
- The project you’re working on must be more than just applying existing solutions to a routine problem. The BEIS guidelines say that, for tax purposes, an R&D project is one that seeks to achieve an advance in science or technology through the resolution of scientific or technological uncertainty. The knowledge being sought must not be already available in the public domain.
- This definition of ‘advancing knowledge in science or technology’ is wide-ranging, and has encompassed a range of projects including developing ways of artificially ageing materials to produce bespoke ‘antique-looking’ furniture, developing packaging to improve the shelf-life of perishable goods or creation of software for either sale or internal use. It’s not just restricted to activities carried out by scientists in lab coats.
- The guidelines include work on both products and services for sale and developing equipment and processes for internal use. It doesn’t cover the cost of projects where you are carrying out R&D work as a chargeable service to your clients, as that is seen as just normal cost of sales.
- The costs to use in calculating the claim include salaries of staff working on, or supporting, the project (pro rata, if not wholly involved). Where employees are provided by third-parties, e.g. agency workers, they must be paid through a UK payroll. It also includes the associated employer National Insurance and pension contributions for these employees, plus the costs of software, cloud computing costs, online storage, materials consumed and an appropriate share of the utility bills. Where you subcontract part, or all, of the work to a third-party, 65% of those charges go into the calculations, provided that the work is physically carried out in the UK.
- To claim the allowance or payable tax credit you will need to provide a report explaining what scientific or technical uncertainty you were trying to overcome. You also need to explain how your project attempted to resolve it and why it couldn’t be easily worked out by a professional working in the specific field or sector. NOTE: the project doesn’t have to be successful to qualify for the relief.
What if you are making losses?
Using the current 19% corporation tax rate, every £1,000 of qualifying expenditure will result in a tax saving of £437. If you’re making a loss, rather than carrying it forward, you can opt to surrender it for a payable tax credit of 14.5% of the loss – that’s a cash receipt of £333.50.
- For accounting periods beginning on or after 1st April 2021 this payable tax credit is capped at a maximum of £20,000 plus 3 times relevant expenditure on workers during the accounting period.
- For accounting periods shorter than 12 months, the £20,000 amount is reduced proportionally.
The ‘relevant expenditure’ is the total due for the accounting period in respect of PAYE and Class 1 NI contributions (both employer and employee contributions) for all employees. Any deductions for statutory parental leave should be ignored. Where R&D is subcontracted, or where workers engaged on R&D are externally provided by a connected company, an appropriate amount of PAYE and NI in respect of those workers can also be included in the cap.
The cap does not apply where the company meets both of the following conditions:
- Condition A is that the company is creating, or preparing to create, relevant intellectual property, or performing significant management activities in respect of its existing IP.
- Condition B is that no more than 15% of the qualifying R&D expenditure must be for work subcontracted to a connected company or for externally-provided workers from a connected company.
Under all circumstances, the maximum amount that can be surrendered for a payable tax credit is the lower of the unrelieved trading loss for the period and 230% of the qualifying R&D expenditure.
Whether or not a cap applies, it may be better not to surrender the loss, but instead to carry it forward to reduce future tax payable. You should also be aware that any amount payable may be offset against other amounts due to HMRC for corporation tax, VAT and PAYE.
Talk to us about exploring the R&D allowances
It’s possible that your company has been carrying out qualifying R&D work without even realising it. If you are, that’s a substantial tax relief that could be lost.
Come and chat to us about your recent development work. We’ll be able to let you know if your R&D work is eligible and can help you to prepare the complex claims documentation.
Ascentant Accountancy are Accountant’s based in Derby who specialise in working with Small Businesses across the Country – Get in touch on 01332 981920 or email@example.com to discuss your needs.
We can be found at Suite 5 Keynes House, Alfreton Road, Derby, DE21 4AS
Once you’ve sold your business and have received the funds from the sale, you’re then faced with a big question: what happens next?
After guiding the helm of your company, it will be tough to let go. But if the circumstances are right, there’s no reason why exiting the business should be a sad occasion. You’ve built a stable business and personal legacy. You’ve employed a team of talented people and helped them drive their careers. And you’ve brought your products and/or services to a satisfied and loyal customer base.
So, how will you now focus your time and effort? Let’s look at your options…
Retire and live out the entrepreneur’s dream
After many years of hard work, worries and stress, the thought of a business-free lifestyle may well be appealing. But retirement isn’t for everyone. If you have thrived on the pressure, challenges and excitement of being the captain of your business ship, retiring may seem like a step away from the action.
On the flipside, the allure of a more relaxed lifestyle may be strong. With the proceeds from your sale, you should be in a position to make you, your family and those around you very comfortable. It may be that the entrepreneur’s dream of building a business, selling up and retiring to a hot climate is your idea of perfection.
Stay involved in the business
Even though you don’t own the business anymore, it doesn’t mean you have to step away completely from the company. You could remain involved in the business in some capacity, allowing you to ‘keep your hand in’ and support the future course of the business.
For example, you could become:
- A joint partner in the business – you could sell a part share in the business and work as a joint partner with your new investor. This allows you to free up some capital, while maintaining an element of control and influence.
- An external adviser or consultant – you could advise the new owner and their board as an outside adviser. After all, who knows this business better than you? Becoming a consultant could well be an astute move and keeps you in the loop with the future path of the business – while charging out a consultancy fee as an added benefit.
- A non-executive director (NED) – you could join the board as a NED and use your personal experience to help guide and support the new owner and their board. If that’s the route you choose, it’s a good idea to retain some shares in the business, so you have a vested interest in the company’s performance and your own share value.
- An informal adviser to your family – if you’re handing the business down to the next generation of your family, they will almost certainly want your advice. You’ve been through the ups and downs of setting up the business, so you’re in the best position to give your family the guidance and tips they need to run a smooth operation.
Set up a new business
With so much experience behind you, it could be that you’re itching to start the whole business cycle again. If you’ve got the ideas, the capital and the motivation to start another new business, this can be a new and rewarding challenge to get your teeth into.
First time around, you’ll have been a little green and less aware of the many pitfalls of founding a new business. You’re now better prepared and more knowledgeable about what’s required from a founder and business leader. We learn plenty from our mistakes, so you’re in a great position to return to the business cycle again with a new idea.
As with any new businesses venture:
- Make sure you have a detailed breakdown of your business idea
- Write an in-depth business plan that maps out your journey
- Ensure you have the funding to get this idea off the ground
- Be prepared for a period of hard work and lower income before the company takes off.
Do your bit for charity and your community
We all have interests and causes that are close to our heart, so supporting charities and community projects in these areas is a great way to use your money for long-term good.
Donating money to your chosen charity or social enterprise is also a triple whammy:
- You get to provide funding to causes that are close to your heart
- You can be philanthropic and help people who are in challenging situations
- You get the positive impact of tax breaks for donating to charity.
You also have the option of putting your own time into working with these charitable causes. You can use your expertise and experience to guide them, help with fundraising or provide hands-on support at events, community projects or lobbying the Government for greater support.
The end of the road, or a new chapter?
Once the business is sold and you close your office door for the last time, you take a step into the unknown. But with so many varied and valuable options to choose from, your life post-exit need never be boring or predictable.
The potential is there for an exciting new venture, or the pleasure of relaxing in the sunshine by the pool. It’s up to you to define the next chapter in your life and your business career.
If you’re thinking about exiting your business, please do get in touch. We’ll help you plan your exit strategy, add value pre-sale and choose the best options for your personal future.
Talk to us about your next step.
Ascentant Accountancy are based in Derby (01332 981920, firstname.lastname@example.org) and Ripley, Derbyshire (01773 424009, Ripley@ascentant.co.uk), call us to see how we can assist.