Value of R&D Tax Credits

Video Transcription

Hello, and welcome to another episode of The Growth Insider.

In this session, we’re going to have a look at the value of R&D tax credits.

We’ve done another video on the business R&D tax credit. If you haven’t seen that, do go and have a look just before you watch this session. I can recommend that.

Value of R&D an Example

So what’s the value of R&D tax credits? Let’s take an example. We will use our favourite company, Growth Limited which is a fast-growing organisation that is spending a lot of time and money in pursuit of that growth.

Loss-making in pursuit of growth

Therefore, due to investment, Growth Limited is currently making losses. It is a loss-making company based in the UK.

Last year, Growth Limited spent about £250,000 on qualifying research and development projects. So, that £250,000 was invested in R&D.

That £250,000 was made up of people’s time, employee’s time, subcontractors and other materials that were put into the project. So they spent in cash terms, £250,000. If we want to look at how that now converts into an R&D reclaim and what that’s worth, we need to do something called an enhancement.

How enhancement works

HMRC allows you a 130% enhancement when looking at what you’ve actually spent. So if we take 130% of our original £250,000, that totals £325,000, so a 130% enhancement of that money.

You’re then allowed to add the £325,000 to the £250,000 you actually spent to get a new number, which is £575,000. This is what’s called your Enhanced R&D Expenditure.

So, enhanced R&D expenditures, a notional amount that you have spent on R&D, are already quite high.

This enhancement has been creeping up gradually over the last 5 to 10 years and now is a very generous 130%. So we’ve got £575,000 pounds worth of enhanced expenditure. The principle behind R&D tax credits is that you can surrender this enhanced expenditure, which would otherwise be a loss for the company.

Surrendering enhanced expenditure

You can surrender that enhanced expenditure, and there’s a surrender rate or surrender percentage that you can apply. You can say, I’m going to give up this £575,000 pounds, and I’m going to surrender that in exchange for some money, some cash in this example.

So the surrender rate. is fourteen and a half per cent of the five hundred and seventy-five thousand pounds. So that gives us a total claim of £83,375 for our company, which is an incredible amount of cash claimed back, given that you spent two hundred and fifty thousand pounds on qualifying R&D expenditure in the first place. And that is actually 33 and 1/3% of what you spent in the first place.

That means, if you think about it, that a third of your cash expenditure on qualifying projects was given back to you.

In this scenario, we are a loss-making, growing UK company, so there is a huge incentive to spend money on R&D projects. And if you’re spending money on R&D projects as a business, I’m sure you’re looking to make a return on that as well.

Conclusion

This really is going a long way towards paying for some of that investment that you’re making. And it’s completely free money. In this scenario, you’ll get that as cash back into your bank. So £83,375 for £250,000 of investment in R&D activities. What’s not to like about that?

We’ll see you next time.

Bye bye.