Are you a large business that invests money in creating or improving products, processes and services? If so, you could be eligible for ‘above-the-line’ research and development (R&D) tax credits. In this article, discover what above-the-line R&D tax credits are and find out how Ayming can help guide you through the claims process.
What are above-the-line tax credits?
Above-the-line tax credits, also known as the Research and Development Expenditure Credit (RDEC) scheme, is a company’s profit before tax is applied – it allows larger companies to reduce their R&D costs. The scheme encourages businesses to invest in R&D and rewards them accordingly.
Larger companies are usually charged corporation tax on their profits, this scheme is designed to help businesses lose fewer profits to tax.
How does it work?
As R&D above-the-line credit is charged before tax, it makes it more visible and helps businesses forecast their cash flow and performance more accurately. This can help you make better investment decisions and can also be included in your income statement, making your company look more profitable.
R&D projects involve a lot of trial and error, so, inevitably, some projects won’t be successful. However, even if your project fails, you can still claim above-the-line tax credits (as long as the project is eligible).
Who is eligible?
The RDEC scheme is mainly for large companies that are investing in and innovating new services, goods, or processes. Large companies are businesses that have:
- More than €100 million in annual income and
- Over €86 million in gross assets,
OR
- More than 500 employees
However, if SMEs have subcontracted their R&D, carried out R&D work on behalf of another company, or received an R&D government grant, they can also apply for the RDEC scheme.
Examples of qualifying R&D expenditure
It’s important to remember that the RDEC doesn’t let you claim against all your expenditure, you’re only allowed to claim against certain costs. These include:
- Money spent on consumables and materials vital to the project
- Certain software expenses
- People costs, such as clinical trial volunteers, salaries, business expenses and externally provided workers
- Costs contributing to stand-alone research
Rates
Companies applying for the above-the-line R&D scheme can claim 20% of their qualifying R&D expenditure. You can use these calculations to work out your tax credit amount:
- Qualifying R&D expenditure x 20% (above-the-line credit) = Gross credit amount
- Gross credit amount – 25% (Corporation Tax rate) = After-Tax benefit
This equates to a net cash benefit of 15% of the eligible expenditure.
However these rates have recently changed: for expenditure incurred prior to 1 April 2023, a lower gross credit of 13% is available, combined with the lower Corporation Tax rate of 19%. This led to a net benefit of 10.53%.
In some cases, companies operating at a loss can claim a cash payment through the RDEC scheme.
Corporation tax liability
As the RDEC is an above-the-line tax credit, companies can offset it against their tax and diminish their corporate tax responsibility, meaning they will lose less profit to tax. If your business isn’t eligible for corporate tax, you can claim a cash payment instead.
How Ayming can help you?
We have over 20,000 clients all over the world and process over 16,000 R&D claims per year, so our experts are well-equipped to help you with your R&D claim.
We will guide you through the process of submitting an R&D claim to make it as easy as possible, helping you choose the right R&D claims to improve the cash flow for your business.