From high-tech developers to small organic companies, aspects of traditional R&D (research and development) are present. Product testing, defect correction, and advantage analysis are all everyday parts of the development process. What few companies know, especially SMEs, is that there can be a significant benefit to claiming R&D tax credits.
This blog will attempt to guide you through the surface-level aspects of the R&D tax system, but you should always contact a business advisor when you are unsure; they can make sure you get all the benefit you are entitled to and can protect you from any unwanted audits.
Why does the R&D tax system exist?
There’s a reason that R&D is particularly special for businesses: it provides significant improvements to the product. However, for every step in the right direction, there are countless missteps and failed approaches. The government recognises this; R&D outcomes are rarely profitable, so the tax system is set up to bear some of this weight and ensure that R&D continues.
On the societal level, R&D provides progress. New technical achievements, medical devices, and transportation systems must all undergo some sort of research testing. The government sees the potential for negative outcomes and costly failures to become deterrents to progress. A society without R&D has a stalled economy. By providing tax relief to R&D helps ensure its continuance.
Who is R&D tax relief for?
To qualify for R&D relief you must be operating as a limited company, as sole traders and partnerships do not qualify for R&D relief. There are two forms of R&D tax relief depending on your company size, the first being the SME relief whereby the company will be able to claim an extra 130% (based on current legislation) of qualifying R&D expenditure against its tax liability.
The second being RDEC, which is for larger companies (please see below) who do not qualify for the SME relief, which broadly speaking provides a company with a 13% (based on current legislation) tax credit on qualifying R&D expenditure, which is taxable and used to offset your tax liability, or in certain circumstances repaid in cash.
SMEs can also use the RDEC scheme in certain circumstances. The definition of a large company is:
> Employ 500 staff or more and have either:
> Turnover of more than 100 million euros; or
> Gross balance sheet assets of more than 86 million euros.
“Some small businesses are eligible to receive tax credits of up to 33p for every 1 pound spent on qualifying activities.”
Once you have decided that your company qualifies for R&D tax relief, a claim is made on the company’s corporation tax return form as part of the annual compliance cycle. Depending on the size of your company you may be able to apply for advance assurance to HMRC to seek an agreement that your claim qualifies, which lasts for three years. If your company doesn’t qualify for advance assurance then it is customary to prepare a detailed report evidencing the R&D claim.
What does the credit actually mean?
Put simply, the credit means that less tax is charged on R&D than on other parts of a business. And while the process was once laborious, the new system of application is much simpler and can provide businesses with significant sums. For example, some small businesses are eligible to receive tax credits of up to 33p for every 1 pound spent on qualifying activities. Small businesses are able to claim more than larger organisations, so the trouble is certainly worth it.
If your business participates in R&D, be sure to look into your eligibility for tax credits. It could save you money and help you continue your development!