Small businesses are the lifeblood of the UK economy. There were almost six million small and medium-sized enterprises, or SMEs, at the start of 2020, which makes more than 99 percent of the country’s total business numbers.
And while 2020’s global pandemic and the associated human and economic costs have hit the SME sector hard, it’s also these businesses that keep the economy turning. Many have found flexibility and adaptability, developed new ways of working, and broken new ground in innovation to ensure longevity and future growth.
For those SMEs registered and operating in the UK, that innovation means they could have access to tax relief.
What are R&D tax credits and who qualifies for them?
The UK government provides tax relief to businesses undergoing innovation and development under the R&D tax credits scheme. It’s designed to encourage innovation and increase spending on R&D activities for UK companies.
HMRC has two schemes available for claiming tax relief: the small or medium sized enterprise (SME) scheme, and the research and development expenditure credits (RDEC) scheme. Since its launch, more than 300,000 claims have been made, totalling more than £33.3 billion in tax relief.
To be considered an SME by HMRC for these purposes, your business must have:
- less than 500 staff
- a turnover of under €100m or a balance sheet total under €86m
The small or medium-sized enterprise (SME) R&D tax relief allows companies to:
- Deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction
- Claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss.
Some of the costs that claims can cover include:
- Staff salaries, NI, pensions and expenses spent on R&D
- Time and resource spent on defining objectives, feasibility studies
- Software downloads and subscriptions, apportioned for subsequent use
- Subcontracting costs
- Utilities such as water and power
- Materials and consumables
- Prototype development
- Project planning, administration, finance and personnel services
- Training to support R&D
While the R&D tax credits scheme is tax relief, its benefits are numerous. For example, the recovered funds can be reinvested into further R&D, used for purchasing new machinery, materials or technologies, or invested to generally help business growth. It can also help an SME to survive an economic downturn or a rough patch in the business. R&D tax credits can bring in transformative sums of money, increase your capital runway, clear outstanding debt and invest in skilled staff or further R&D projects to continue the investment cycle.
However, there is no single definition for what qualifies as innovation or what falls under applicable R&D activities under the R&D tax credits scheme, which makes it tricky for SME business owners to understand how to access this tax relief.
What activity can qualify an SME for R&D tax credits?
HMRC has a specific statutory definition of R&D for the purposes of R&D tax relief, and it differs from the commercial, engineering or accounting definitions.
R&D doesn’t just mean boffins in a science lab or teams of people in a dark basement hammering at computer code; R&D tax credits are open to all UK companies regardless of sector. To meet the requirements of the R&D tax credits scheme, an SME must have undertaken qualifying research and development activities, which can include creating new products, processes or services, or changing or modifying an existing product or service.
While pure product development won’t qualify, and “commercially innovative” isn’t enough, qualifying R&D could include:
- Creating new processes, products or services
- Making appreciable improvements to existing processes, products or services
- Using science and technology to duplicate existing processes, products and services in a new way
When assessing your SME for R&D tax credit potential, ask yourself:
- Does my company have a R&D project?
- Am I seeking an advance in a field of science or technology?
- Does the advance extend the overall knowledge or capability in the field of science or technology and not just the company’s own state of knowledge or capability?
- Does the project involve an uncertainty that competent professionals can’t readily resolve and where solutions aren’t common knowledge?
Why don’t more businesses claim this tax relief?
While all the experts tell us to be open minded about what qualifies as R&D for the purposes of R&D tax credits, there are still plenty of SMEs in the UK that are either nervous about the claims process or simply unaware of the scheme. The ambiguity in qualification means the scheme is heavily under-utilised across most sectors and industries.
HMRC keeps its definition of research and development purposefully broad so that it can be tailored to an individual business or sector. In essence, though, if your company is taking a risk by attempting to “resolve scientific or technological uncertainties”, then you may be undertaking activities that qualify for R&D tax credits.
Adding to the underuse is the complicated application process, which can put off many smaller business leaders from trying their luck. It takes time and research to identify exactly which projects can be classed as R&D for tax relief purposes, and figuring out which costs within those projects are eligible. Any misunderstanding or application issue could result in wasted effort, and no tax credit. Keeping good – and, ideally, real-time – records of investment in R&D will make any tax relief claim more precise and increase the chances of a successful claim.
Where can you go from here?
Where do you go from here?
Our team works in partnership with the leaders of SME businesses, guiding them through the five easy steps to a successful R&D tax credit claim:
- We’ll chat about your projects
- You upload the necessary information to our secure portal
- We analyse the data on your behalf
- We submit your R&D tax credit claim with HMRC
- HMRC reviews your claim and will notify either you or us if a repayment is due
We take care of most of the claim process, keeping client commitment to a minimum and maximising the claim value that can be received
With a single-minded focus on R&D tax relief and a diverse team of technical experts, we work hard for clients so they can put more back into their company.
Get in touch with our team and find out how you can claim R&D tax relief for your SME.
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