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Cracking the code: A guide to R&D tax credit calculation

4 September 2023

A featured image for the blog post explaining the steps of R&D tax credit calculation

Are you a business engaged in Research and Development (R&D) activities looking to receive a cash injection into your business? Look no further! The R&D tax credit calculator is designed with simplicity and accuracy in mind to help you navigate the complex calculations of research and development tax credits. This step-by-step guide will walk you through the entire process of navigating through the R&D tax credit calculation, ensuring that you don’t miss out on any potential savings. With the ever-changing tax laws and regulations, it can be challenging to keep up and take advantage of the available credits. That’s where these R&D tax credit calculators come in. By inputting your company’s details, expenses, and qualifying activities, you will receive your estimated R&D claim in a few clicks. You’ll know the maximum tax credits you can claim, putting money back into your pocket. 

What is an R&D tax credit calculator?

The R&D tax credit calculator is a powerful tool that allows businesses to determine the amount of tax credits they can claim for their research and development activities. By using an R&D tax calculator, you can easily input your company’s financial information, including expenses related to research and development projects. The calculator then does the precise R&D tax credit calculations to provide the estimated amount of tax credits you can claim. This valuable information will help you make informed decisions about your R&D claims.

How to perform an R&D tax credit calculation?

Using an R&D calculator is straightforward and follows a systematic approach, aiming to quantify potential tax credits for your research and development activities. For instance, with the r&d credit calculation example provided below, you can understand the step-by-step process of effectively utilising an R&D calculator to capitalise on its full potential.

Gather your financial information

Collect all the relevant financial data related to your research and development activities. This includes expenses such as employee wages, contractor costs, software purchases and more.

Input your data

Enter the collected financial information into the designated fields in the R&D tax credit calculator. Make sure to provide accurate and complete information to ensure accurate calculations.

Review your results

Once you’ve entered all the necessary data, the R&D tax calculator will generate an estimated calculation of the maximum tax credits you can claim. Take the time to review the results and understand how they can benefit your business.

Consult with R&D tax specialists

While R&D calculators provide accurate calculations, it’s always a good idea to consult with R&D tax specialists to ensure you’re fully optimising the opportunity to receive tax credits.

The benefits of R&D tax credit calculation using an R&D calculator

Using an R&D calculator to calculate R&D tax credits can be a game-changer for businesses and organisations engaged in research and development (R&D) activities. These simple yet powerful tools offer a multitude of benefits that go beyond mere number crunching. Below are a few of the benefits of using an R&D calculator:

  • Accuracy: Calculating R&D tax credits can be complex, with various rates and regulations to consider. An R&D calculator takes into account all the relevant factors and ensures accurate calculations, reducing the risk of errors and potential penalties from HMRC.
  • Time-saving: Manual calculations can be time-consuming and prone to mistakes. An R&D calculator automates the process, saving you valuable time and allowing you to focus on other important aspects of your business.
  • Maximised savings: By accurately calculating the maximum tax credits you can claim, an R&D tax calculator ensures you don’t miss out on any potential savings. This can significantly reduce your tax liability and increase your available funds for further investment.

What are R&D qualifying costs?

Research and Development (R&D) qualifying costs are the expenditures incurred by companies in their pursuit of innovations and advancements. Properly identifying and documenting these expenses is crucial for maximising tax incentives while adhering to tax regulations. These costs, which encompass employee wages, materials, software purchases, and more, are essential for calculating R&D tax credits. We will now explore the key components of R&D qualifying costs and how to leverage them for financial benefits in your innovative endeavours.

Staff PAYE costs/ Pension contributions

You are eligible to request reimbursement for various expenses associated with staff members who are directly engaged in the R&D project and if these expenses are related to the R&D efforts. This includes items like bonuses, salaries, wages, pension fund contributions, and certain National Insurance contributions paid by the company. In specific situations, there is also the potential to claim for certain administrative or support staff expenses that are directly linked to a project, such as human resources expenses for recruiting a specific individual for the project or specialised cleaning staff. These are categorised as qualifying indirect activities.

Sub-contracted costs

These refer to the staff costs paid to an external agency for individuals who are directly and actively involved in the R&D project. These individuals are not employees or subcontractors but are engaged through the agency. Typically, relief is provided on 65% of the payments made to the staff provider. However, specific rules come into play if the company and the staff provider are connected or choose to be connected.

Consumables & Utilities

You have the option to request reimbursement for the appropriate portion of consumable items that were expended during the R&D process. This encompasses items like fuel, materials, power, and water. However, it’s important to note that you are ineligible to claim these expenses if you sell or transfer ownership of the consumable items that were utilised in the R&D activities.

Software purchases

Starting from accounting periods commencing on or after 1 April 2023, eligible expenditure has been expanded to encompass the pertinent components of data licence expenses and expenses related to cloud computing.

A data licence pertains to a licence that permits the access and utilisation of a compilation of digital data.

Cloud computing encompasses various elements, including:

  • Data storage
  • Hardware facilities
  • Operating systems
  • Software platforms

You can claim most of the costs associated with data and cloud computing that you have utilised for research and development (R&D) purposes.

Clinical trial volunteers

In the field of pharmaceutical R&D projects, you have the opportunity to request reimbursement for payments provided to participants involved in clinical trials.

Travel costs

Certain travel expenses related to your research and development (R&D) efforts may qualify for R&D tax credits. These expenses include costs for collaborating, attending relevant events, visiting research sites, or conducting fieldwork directly tied to your R&D projects. However, eligibility depends on their direct contribution to R&D.

What are the costs that don’t qualify for R&D?

Certain expenses do not qualify for R&D tax credits, including routine business operations, capital expenditures, and non-R&D-related activities. Recognising these non-qualifying costs is essential for accurate tax credit calculations and compliance with tax regulations. A few examples of these expenses are listed below:

  • Capital expenditures such as the purchase of land
  • Expenses related to patents and trademarks
  • Rent or rates
  • Costs associated with the production and distribution of goods and services
  • Redundancy payments
  • Staff costs related to clerical or maintenance work such as payroll management.

How to calculate R&D tax credits for SMEs?

The financial status of your SME will determine the rates of R&D tax credits, whether it’s making a profit or facing a loss. Generally, an SME can get up to 27% benefit from this relief. SMEs trading at a profit or loss can calculate their entitlement based on the R&D enhancement. The R&D enhancement is calculated at 86% of the qualifying expenditures which is then added back onto the qualifying expenditures to give you the enhanced expenditure (186%).

Calculating R&D tax credits for a profit-making SME

If the normal taxable profit/trading loss exceeds the R&D enhancement, it leads to a trading profit after R&D with no surrenderable loss. In this case, the entitlement payable will be calculated at the Corporation Tax rate of 25% of the R&D enhancement. This can result in a Corporation Tax reduction or refund if the tax has already been paid.

Calculating R&D tax credits for a loss-making SME

Loss-making SMEs have the option to surrender either the lower amount between the enhanced R&D relief or the taxable losses incurred during the period. By surrendering these losses, the company can receive a cash credit in the form of a tax credit payable, currently set at a rate of 10%.

💡 For companies claiming for periods starting before April 1st, 2023, the current rate of 130% of qualifying expenses will apply. For companies claiming R&D relief for periods starting on or after April 1st, 2023, their entitlement will be calculated at 86% of the qualifying expenses. Visit SME Scheme for examples of these calculations.

R&D tax credit calculation under RDEC?

The RDEC rate has been established at 20% amid the recent changes to R&D tax relief. Businesses are now able to recover up to 20p for every £1 invested in eligible R&D activities. This rate remains consistent irrespective of the financial circumstances as opposed to the SME scheme.

Steps to submit your R&D claim

Claiming R&D tax credits involves several essential steps to file a claim with HMRC. Let’s outline these key steps, regardless of your organisation’s size.

Choosing the right R&D scheme

In order to initiate a robust claim, you first need to identify which R&D scheme you will be opting for. The R&D tax relief covers two R&D schemes: the SME Scheme, designed for small to medium-sized enterprises, and the Research and Development Expenditure Credit (RDEC), which enables larger companies to claim R&D tax credits.

Identify qualifying activities

Familiarise yourself with the activities that qualify for R&D tax credits. These can include developing new products, improving existing processes, or conducting scientific experiments. Keep detailed records of these activities for future reference.

Document your expenses

Collect and keep track of all expenses related to your qualifying research and development activities. Accurate documentation is crucial when claiming tax credits.

Identify Qualifying Costs

Identify costs based on the percentage of time or resources dedicated to qualifying activities. This includes expenses like staff salaries, software purchases, materials, subcontractor fees, utilities, travel costs, and more.

Performing R&D tax credit calculation

Once you have your expenses documented, calculate the portion that qualifies for R&D tax credits. Enter the collected financial information into the designated fields in the R&D tax credit calculator. Be sure to provide accurate and complete information to ensure an accurate estimated R&D claim entitlement.

Apply for R&D tax credits

After obtaining the estimated entitlement and reviewing it, submit your claim for R&D tax credits. Include all necessary documentation and supporting evidence to maximise your chances of approval.

💡 Monitor changes in tax laws: Stay up to date with any changes in tax laws and regulations that may affect your eligibility for R&D tax credits. This will ensure you continue to maximise your savings and take advantage of any new opportunities.

Conclusion and next steps

In conclusion, the R&D tax credit calculation is a foremost aspect that can significantly benefit businesses of all sizes when making an R&D claim. By following the steps outlined in this guide and utilising the R&D tax credit calculator, organisations can unlock valuable financial incentives for their innovative efforts. From identifying eligible expenses to accurately quantifying potential credits, the process may appear complex. However, engaging with R&D tax credit specialists is a strategic move that can significantly enhance your chances of success. Their expertise, attention to detail, and ability to navigate the intricacies of tax regulations can help you make an error-free application to HMRC.

How can we help you make a robust application?

Our team of experienced R&D tax credit specialists is well-versed in the ever-evolving governmental regulations, grants, tax incentives, and funding opportunities available to companies across various industries within the UK. Our experts have delicately designed our R&D tax credit calculator to simplify the complex process of determining your eligible tax credits. With our best-in-class expertise, we can help you accurately and precisely claim R&D tax credits based on the latest guidelines, ensuring a high success rate with HMRC. Book a free consultation for tailored advice and to start your R&D tax credit claim.

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