HMRC believes that many smaller businesses are missing out on R&D tax credits that they could be claiming. From our experience with technology and internet businesses we have certainly seen many opportunities for claims where research and development expenditure has been incurred.
Some businesses assume, wrongly, that work they are doing to bring innovative solutions to market won’t qualify; some assume that the benefit is aimed at larger businesses with dedicated R&D resources; and some simply believe that the scheme will be too complicated and bureaucratic.
The first two of these are generally not the case. Claiming the relief is also more straightforward than many assume. The good news is that the Spring Budget announced the intention to make the scheme even easier for small businesses.
How Does the Scheme Work?
Under the R&D SME scheme you can claim tax relief on allowable R&D costs at 230%.
As a simplified example, say you have £1000 of qualifying R&D costs; you could reduce your taxable profit by an additional £1300 on top of the £1000 spent.
The total reduction in taxable profit in this example is £2300 (£1000 + £1300), which at 20% results in a spend of £1,000 having a net cost impact of £540.
If your company makes a loss you can add the R&D tax credit to your loss for the year and carry the combined ‘loss’ forward for tax purposes. If you make a small profit, the R&D relief may mean that you effectively make a loss for tax purposes.
You could also surrender the combined ‘loss’ for a repayable tax credit of 14.5%, up to the value of the enhanced expenditure.
To qualify for R&D relief you must have fewer than 500 employees and either an annual turnover below €100 million or a balance sheet under €86 million.
If you have fewer than 50 employees or revenue of less than £2m, and you haven’t claimed the relief before, you can get ‘advance assurance’. After you have provided HMRC with some brief details of the activities you plan to claim relief for, and they have accepted that these activities qualify, you will not receive an HMRC enquiry for the next three accounting periods.
Details of the new measures are still to be provided but they are expected to make it even simpler for smaller businesses to claim the relief with confidence.
We have found the research and development team within HMRC to be very friendly and genuine relief for research and development is being pushed by the government.
Is it too Late to Claim?
The good news is that you can claim for expenditure going back 2-3 years in addition to ongoing costs. As is so often the case, the more thorough your record keeping, the more chance you will have of a successful claim.
If you think you could be missing out, the Langricks team will be happy to advise you on whether work you are doing will qualify and on how to make a successful claim for the relief.