If your business is working on innovative projects within science and technology, whether your projects are successful or not, you may be able to claim research and development corporation tax relief. With the opportunity to deduct up to an extra 130% of your qualifying costs from your yearly profit, on top of your normal 100% deduction, R&D relief is definitely something to utilise to its full potential. If your company is loss making, you’re able to claim a tax credit worth up to 14.5% of the surrenderable loss.
With that in mind, here are four things to consider before you jeopardise your eligibility.
1. Transitioning from an SME to a large company
Generally speaking, growth is good. When it comes to R&D relief, however, moving beyond the realms of the SME is going to cost you. Once your full-time equivalent headcount hits 500, your turnover hits €100m or your balance sheet total hits €86m, you can wave goodbye to a large portion of your R&D incentive. In fact, it drops from 33p in the pound to 10p in the pound. There’s some good news though, you’ll be granted a single ‘year of grace’ where you can continue to claim as an SME and make the most of your exemption.
2. Being bought by, or buying, another company
When determining whether or not your company meets the criteria to be granted SME status, companies connected through common ownership are considered. Anything from the purchase of a significant shareholding to being purchased by a large company could cross that line and remove your SME status. In this case, you will not be granted a ‘year of grace’ and your benefit will be limited for the whole year in which the purchase occurred.
3. Moving from loss into profit
A company entitled to R&D relief that makes a loss in-year can claim a cash benefit of up to 33% of its R&D expenditure, while a taxpaying company is entitled to a cash benefit of around 25%. By no means would we suggest avoiding profit solely to maintain your R&D relief claim, however if your company has been functioning at a loss for a while, that sudden removal of a cash injection could be a shock. Just make sure you’re aware of the consequences of your changing status and anticipate how to account for them.
4. Paying large dividends
Simply put, dividends are not claimable as a cost of performing R&D. Although a director’s dividend income is subject to lower income tax than employment income, they cannot be considered a ‘consequence of employment’. This is something to bear in mind if you have a director who contributes a lot of time to research and development and takes large dividends, as they may actually be making very little positive contribution to your R&D claim.
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