R&D tax relief can take three forms: “SME-scheme” tax credits, “RDEC”, tax reductions, or “enhanced losses” carried forward.
SME-scheme tax credits are available to SMEs that are loss-making or narrowly breaking even. Because tax credits are a form of state aid, they don’t apply to projects that already have grant support. Maximising R&D tax relief around grants is a complex task, and the best time to take advice is when negotiating Grant Offer Letter or Collaboration Agreement (after winning the grant and before becoming contractually bound). R&D tax credits are worth up to 33% of qualifying R&D spend. A portion of an R&D tax credit is “free money”, but a portion is paid back in the future, when you become profitable. (You carry forward fewer losses, and therefore more of your future revenues will constitute taxable profit.)
RDEC, Research and Development Expenditure Credits are available to companies of all sizes and can sometimes be combined with grant support. This type of support is worth up to 13% of a qualifying R&D spend.
Tax reductions from R&D are available to profit-making companies that would otherwise pay corporation tax (or pay more corporation tax). Tax reductions can arise from either or both of the SME scheme or the RDEC scheme. Tax reductions for R&D are typically worth 25% of qualifying expenditure when the SME scheme applies and 13% when RDEC applies.
Enhanced losses carried forward are a way to reduce future tax bills. SMEs, whether profitable or loss-making, can “enhance” the losses on their tax return by 130% of qualifying R&D spend. In other words, if you spend £100 on R&D, you can report an “enhanced” loss of £230. The enhancement offsets future profits, so you can earn more revenue before you start paying tax. Enhanced losses carried forward are typically worth 25% of qualifying R&D spend.