Boosting innovation in small businesses with R&D tax credits

Here’s how the government’s R&D Tax Credit initiatives are helping to foster innovation in small businesses across the UK.

Innovation in small businesses is an expensive necessity. In order to be at the forefront of their industry and stay ahead of the competition, businesses need to constantly be developing and creating new technologies.

However, creating these new technologies is an expensive and often risky affair. Small and medium-sized enterprises (SMEs) often lack the manpower and resources to invest in feasible R&D projects. Even large organisations are often daunted by the risks of investing in new materials and technologies with a high propensity for failure.

A hyper-competitive environment, coupled with complex regulatory structures, makes investing in long-term R&D projects a risky bet.

However, the cutting-edge technologies, new materials, and intellectual property created by innovative businesses could be invaluable to society. With this in mind, the UK government has introduced a tax credit specifically designed to offset R&D expenses. Here’s how the government’s R&D Tax Credits initiatives are helping to foster innovation in small businesses across the UK.

Targeted tax incentives

R&D tax credits are designed to incentivise innovation in the economy. This is done by focusing the tax credits on a specifically dynamic sector of the economy – SMEs. To qualify for R&D tax credits, a business needs to demonstrate investments in new processes, services, materials, or technologies. For eligibility, businesses need to have less than 500 staff, a turnover of under €100 million, or a balance sheet total under €86 million. Any risky investment in research and development is considered R&D, regardless of the outcome of the project or the sector in which the business operates.

Unfortunately, most business owners don’t take full advantage of R&D tax credits due to a lack of awareness. However, new services such as Tax Cloud have made it easier for businesses to both understand and claim these credits.

The impact

HMRC’s R&D tax credits have been a catalyst for new developments and technologies in Britain. Companies have saved nearly 33 pence on every pound spent in R&D efforts over the past few years. The tax credits have served as an alternative form of funding besides research grants from various government departments. These tax credits have also helped create a stable environment for businesses who want to risk capital and make long-term investments in an effort to gain a competitive edge.

Since this programme was launched in 2000-01, nearly £9.5 billion has been claimed by more than 285,000 small and medium-sized enterprises across the country. According to a recent report by HMRC, the effects of this program have been in-line with international studies on the impact of tax credits on technical innovations. Businesses have spent more money on creating new technologies with this support. Estimates suggest that businesses spend between £1.53 and £2.35 more for every £1 paid out in tax credits. The durable long-term economic value generated by this scheme could be nearly triple the government’s investment.

This simple tax credit scheme has helped support small and medium-sized businesses take risks and create technologies that add to our quality of life and economic prosperity.

Further reading on R&D

Ben Lobel

Ben Lobel

Ben Lobel was the editor of SmallBusiness.co.uk from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

Related Topics

R&D
R&D Tax Credits