How businesses can maximise their R&D tax credit benefits

Mark Joyner of RDS shares his knowledge of R&D tax credits, outlining just who can apply and what they could expect to receive

97% of eligible SMEs not claiming for R&D

Despite being described as a flagship scheme to stimulate the economy, conservative estimates show that a staggering 97 per cent of those companies eligible for R&D tax credits are not currently engaged with the scheme.

Small businesses across the UK could be benefitting from significant investment back into their companies through the HMRC tax incentive, but for many reasons, the majority are not claiming.

About tax credits

The HMRC Research and Development Tax Scheme was created in 2000 to encourage business innovation and stimulate the economy. Businesses that can demonstrate an attempt to innovate, bringing a new product or a bespoke service to market, can claim thousands back in tax relief, which can be offset against corporation tax.

Chancellor Rishi Sunak recently announced plans to widen the scheme further, ensuring businesses receive even more back against their investment, as well as widening the criteria to make more IT/software claims eligible.

>See also: Sunak eyes reining in small business R&D tax credits

The overall aim is to increase UK R&D expenditure to 2.5 per cent of GDP by 2024.

But figures show that the scheme is greatly underused as is evident from the low percentage of claims. It’s thought that less than £1bn of relief against more than £25bn spent on R&D in the UK.

The question is, why?

The majority of our clients simply don’t have the time to look into it, or don’t believe they would have the time/resources to manage the process through to completion.

Awareness is an issue too. Some of our most successful clients had never heard of the scheme before engaging us. Many others doubt its authenticity. And there is also some weight to the notion that the scheme is overly complicated, but of course companies like ours are on hand to help with all of the above.

>See also: Why small businesses are missing out on millions in R&D tax credit relief

Who can claim for a tax credit?

Any UK limited business can claim for R&D. There are no restrictions on the type or size of business, although the scheme differs depending on whether a business fits HMRC’s definition of a SME or large company.

Eligibility is focused on the research project rather than the type of business. The product or service doesn’t have to be finished or even successful. The research/development phase is often enough for you to qualify, but it does have to be entirely new – it cannot be an off-the-shelf solution.

For the SME scheme, a company must employ fewer than 500 people and have a turnover of less than £85m or a balance sheet total of less than £73m. An SME’s eligible R&D costs receive an additional 130 per cent deduction when calculating the taxable profit.

R&D project criteria to be aware of…

The project must relate to a company’s trade, and you must be able to explain how the project:

  • Looked for an advance in science and technology
  • Had to overcome uncertainty
  • Tried to overcome this uncertainty
  • Could not be easily worked out by a professional in the field

Broadly the following R&D activities qualify:

  • Software development
  • Designing new products
  • Precision engineering
  • Products with new materials
  • Enhancing existing products or technologies
  • Typical R&D expenditures can cover:
  • Staff costs
  • Subcontractor costs

What is an R&D claim worth to your business?

Our average claim currently stands at around £53,000, but when the new changes announced in the Spring Statement come into play this is likely to rise further.

Specialist firms such as our own will interview SME clients, prepare the returns, and charge a fee only against successful credits.

Some recent examples of R&D Tax Credits from our own portfolio of 120 SME clients include a fleet management firm from York receiving £50,000 over consecutive years, and a modular portacabin firm which received almost a £68,000 boost in one year alone.

Having worked in this arena for five years, it still surprises me how many SMEs aren’t taking advantage of the scheme. Companies can benefit from thousands of pounds to reinvest in their businesses, through a successful corporation tax reclaim and from thereon in annual reductions on future corporation tax bills. It only takes 15 minutes to ascertain if you’re eligible so for me it’s a no brainer.

Mark Joyner is company director of Research & Development Specialists LTD (RDS)

Further reading

R&D tax credits: Facts you need to know and mistakes you need to avoid

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Mark Joyner

Mark Joyner is company director of Research & Development Specialists LTD (RDS).

Related Topics

R&D Tax Credits