A recent study has found that thousands of businesses are missing out on the valuable tax breaks that are available for research and development. Many businesses are investing large sums to fund IT development and technological improvements, but failing to take advantage of the R&D tax credits that are available.
It’s thought many companies are either unaware of the potential benefits of R&D tax credits, or think they will be difficult to qualify for. However, this is simply not the case.
What are R&D tax credits?
R&D tax credits were first introduced in 2000 to enable companies that incur costs in developing new products, processes or services to receive a cash payment or tax deduction. Initially, the tax credits were fairly limited in their scope, but in recent years the rates and availability have increased significantly to incentivise companies to claim.
How do they work?
R&D tax credits work by reducing your taxable profit to reduce the amount of corporation tax you pay. However, the scheme is also designed to help companies that are not making a profit by providing a cash credit.
What expenditure is allowable?
If your business meets the necessary criteria, it is possible to claim relief across three main areas. This includes staff costs (i.e. gross salary, employer’s’ National Insurance contributions and pension contributions), subcontractors/freelancers and consumable items (i.e. software licenses, heating/lighting, software/SaaS and hardware costs.
Do you qualify?
To qualify for R&D tax credits you must run a business that employs no more than 500 people and has either an annual turnover of no more than €100million, or a balance sheet total of less than €86million. Small and medium-sized enterprises (SMEs) taking on work as sub-contractors are also eligible.
You must also be able to demonstrate to HMRC that the product or service you’re including in your claim is innovative and represents a technological advance of what is currently on the market. Examples of qualifying projects include:
- Improvements to manufacturing processes or machinery;
- Incorporating new or untested technology into products;
- Making existing products work on new platforms;
- Increasing process efficiency/safety;
- And plenty more besides.
In HMRC’s eyes, if your project is…
- Overcoming technological uncertainties; or
- Aiming to achieve an advance in technology
…then you will be able to make a claim. It’s also important to note that you can still claim R&D tax credits even if the project is unsuccessful. If you do qualify, you can claim tax credits on the day-to-day costs involved in the project, such as staff, subcontractors, materials, software and utilities.
How much is allowable?
Profit making businesses can claim back 26 pence in every £1 of qualifying expenditure as a refund on their corporation tax. The relief for loss making businesses is even greater, with 33 pence in every £1 available as a cash credit from HMRC.
How can we help?
Prosper provides a comprehensive approach to accountancy, tax & business growth services for start-ups, SMEs and growing companies across the UK. We are your bookkeeper, accountant and finance director all rolled into one. Check out prosper.accountant to learn more about how we can help your business.