Debunking SME research and development (R&D) tax credit myths
SRK Accounting
Over the last few months I've come across several business owners who are aware of the Research and Development (R&D) Tax Credit Scheme but didn't think in a million years their business could qualify for it.
When people hear the words ‘research and development', many think of onsite laboratories, workers in white coats or corporate research teams making ground breaking technological advances.
However, if your company is taking a risk by innovating, improving or developing a process, product or service, it can qualify for R&D tax credits.
Even better though is that R&D isn't just related to large items of expenditure but can cover staff, material and premises costs.
There are thousands of companies out there missing out on this relief because they don't believe that the innovation they demonstrate qualifies as an advancement in science or technology.
The most common misconception is that you must invent something completely new that the world has never seen before.
It has been known for R&D Tax credits to be awarded for a range of activities including a company that developed a set of card based language tools for the NHS.
Restaurants have even claimed their recipe development costs!
For small business owners, the R&D tax claim enhancement (the enhanced deduction) is 230% of the qualifying R&D expenditure incurred.
Therefore, where a small business owner incurs expenditure of £100,000 on qualifying R&D, it can deduct £230,000 when calculating its taxable profit or loss for corporation tax purposes.
As the £100,000 would already be accounted for in its accounts, the balance of £130,000 would be an additional deduction from its taxable profit and the corporation tax saving would be £26,000 (at a corporation tax rate of 20%).
The equivalent of the company receiving 26p from HMRC for every £1 they spent on R&D activities. A SME may claim a higher rate of relief than a large company.
Furthermore, a SME without a tax bill to reduce may claim a cash payment instead.
The latest statistics indicate that the number of Small and Medium Enterprises (SME’s) making R&D tax credits claims is rising year on year, with a total pay-out value of over £1b in 2014-15.
This is excellent news as it indicates that more of the smaller UK Limited Companies are aware of the generous benefits that can be claimed under the R&D schemes.
However, there is no room for complacency as there is still evidence that significant numbers of SMEs either don’t know about the schemes or have misconceptions about the types of activities that qualify.
To do it properly an R&D report needs to be compiled outlining: the nature of the claim, how technological uncertainty has been overcome and why the solution wasn't readily available.
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