Q: What do I need to know about R&D tax credits?

How can a small business benefit from R&D tax credits?

Ben Lobel 22/06/2016

How can a small business benefit from R&D tax credits?

Expert Answer

The R&D tax credit scheme was put in place by the UK Government in 2000 to encourage innovation and increased spending on R&D activities.

Initially only available to SMEs, it now extends to all businesses operating in the UK that invest in a qualifying activity, providing they are a going concern and subject to Corporation Tax.

R&D tax credits enable businesses to receive a tax reduction or cash payment against costs incurred whilst developing new, or improving existing, products, services, or processes.

For SMEs it can be an incredibly effective way to offset the cost of innovation, either through reducing the amount of Corporation Tax they pay, or providing a critical injection of cash.

In this instance, an SME is defined as having a headcount of below 500 staff and either having a turnover below €100 million or a balance sheet under €86m.

While both profitable and loss-making SMEs can choose to reduce the amount of Corporation Tax they pay, a loss-making SME can realise a cash benefit of as much as 33.35p for every £1 they spend on R&D in comparison to up to 26p per £1 spent by a profitable business.

So what qualifies? HMRC’s definition of R&D is much broader than most businesses expect and the scheme is certainly not limited to companies developing something completely new.

For example, it could be an improved manufacturing process that saves time or money, the development of a new piece of software, or an improved recipe for a soft drink that reduces the sugar content but keeps the same taste.

And the work doesn’t even have to be successful - SMEs can make a claim as long as the projects in question aim to achieve a technological or scientific advance.

R&D tax credits are an increasingly complex and ever-changing area but can be an incredible valuable source of funding for SMEs at what can be a critical time in their development.

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