Are you making the most of R&D tax credits?

It's not just corporations that do research that qualifies for tax credits. Even smaller businesses can cash in on the research they do. Here's how.

by Jan Post
Last Updated: 23 Nov 2012

Does your business innovate? It’s a generic question that a lot of businesses like to answer with a resounding ‘yes’. However, the majority of companies are missing out on tax relief and they can claim for a huge range of improvements and inventions, which could add up to thousands of pounds. In fact, on average £40,000 can be claimed annually.  

Research and development (R&D) tax relief is effectively a subsidy of 25p for every £1 spent on qualifying R&D expenditure for SMEs, but it is much less for companies with more than 500 employees. It can deliver a substantial reduction in corporation tax payments for these smaller companies or can give you a cash injection if you are a loss-making company. 

Each year the R&D tax relief scheme provides tax incentives to encourage investment in innovation by UK companies. Unlike some other forms of tax relief, HMRC is keen that as many companies as possible apply for it. Both sides of the political divide believe that the more investment that is made in research and technology, the greater the benefits to both individual companies and the wider UK economy.  

However, many people incorrectly assume that R&D activity is only carried out by companies with staff in white lab coats. But it is actually a financial reward for technical developments that seek to deliver a substantially improved product, process, device, material and/or service. The businesses that can claim are therefore very diverse.  

The relevant projects can include adapting existing tools or products, using new materials, developing software or evolving a new process. In fact, anything where an expert is using considerable brainpower to make an improvement, and does not know beforehand whether the outcome will be successful.  

UK businesses are among the most innovative in the world, which makes it surprising that the take up of the R&D tax 'credit' scheme remains so low. As with any government tax scheme, the criteria for eligibility and the process for claiming R&D tax credits can be complex, making it potentially off putting. However, there are specialist companies that work closely with accountants and finance teams to deliver a claim to HMRC for R&D tax credits. They can also set up systems to make future claims less time consuming and more efficient. 

To qualify for R&D tax credits the research activity must meet HMRC definitions, but does not necessarily have to be successful. Failed R&D activity can qualify too. These guidelines state that the work must contribute directly to an advance in science or technology at an industry level. If your company and the project both meet the necessary conditions, then you can usually claim tax relief back on revenue expenditure (generally, day-to-day running costs of the business) in a range of areas. 

Jan Post is managing director, RIFT Research and Development www.riftresearch.com 

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