Research and development (R&D) tax credits allow businesses to receive a cash payment or tax reduction on the costs they incur when innovating, developing or improving a process, product or service.
First introduced in 2001 for SMEs, this remains a key element of the Government’s efforts to encourage innovation by UK companies and the scheme has gone from strength to strength. In recent years the rates have increased substantially to further encourage companies to claim.
There are two R&D tax credit schemes, one for SMEs and one for larger companies. The Small and Medium Sized Scheme sets out the following qualifying criteria.
Qualifying SMEs must:
- have a headcount of below 500 staff
- either have a turnover of below €100 million or Gross assets of less than €86 million
Is my business eligible for R&D tax credits?
In order to be eligible, you must to able to prove that your company has developed or improved a process, product or service that is used in your trade and either enhances the business or its way of doing things. You must also show that that the project uses some kind of science – not necessarily ‘white coat’ science but for example: clever design, new recipes, data science or engineering method. There must also be an element of uncertainty or business risk associated with the project.
If your company and project meet the criteria, the costs that qualify for relief occur across three main areas:
- Staff costs (gross salary, employers NIC, pension contributions)
- Subcontractors or freelancers
- Consumables (heat, power, water, material and equipped used in the R&D process)
In our experience, R&D tax relief can be claimed by almost any business across every industry. We’ve submitted claims for creative agencies, software companies, and architects, food processing and manufacturing businesses.
What could it be worth to my SME?
Currently a loss making SME can claim 33.35% of its qualifying expenditure and can opt to receive this as a cash refund. A profitable SME can recoup of to 26% of qualifying business expenditure. Click here for a worked example.
HMRC estimate that the average annual claim made by SMEs is around £50,000. It’s clear that R&D tax credits can be a valuable source of funding yet the vast majority of SMEs have yet to explore whether they are eligible.
Claims can only be submitted for open tax years. So act now to avoid losing the opportunity!