TAX For Companies

What are R&D Tax Credits? How can small businesses get tax relief?

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What You Need To Know:

Developments in technology and the rise of emerging industries have seen a significant increase in Research and Development (R&D) tax credits since the scheme was first introduced in 2000 by the Blair administration. R&D tax credits can be allocated to a company when it can be demonstrated that an enhancement in a science or technology has sought or has taken place. The advancement can be reflected through empirical means (such as machinery) or intangible evidence (such as computer software.) R&D Tax Credits are therefore a government approved scheme which provide an incentive to invest in R&D, by allowing companies to increase the tax deduction they get for qualifying R&D spend.

How does the SME Tax Credit Work?

HMRC will multiply qualifying R&D expenditure by the relative percentage and have a two tier system in allocating R&D tax credits. Large companies are permitted a credit of up to 11%, whereas SMEs are eligible for a credit of 130% of expenses incurred. The below table shows the requirements to be deemed a SME:

SMEs Conditions

  • Needs to have fewer than 500 employees and either:
    • Has an annual turnover of under 100 Million Euros.
    • Has a balance sheet under 86 Million Euros
HMRC will only permit tax credits for when the costs incurred are wholly and exclusively for the purpose of research and development within a particular trade. Furthermore, only revenue expenses which have been incurred on qualifying expenditure will be eligible for R&D tax credits. The way the relief is applied will depend on whether the company is profitable and paying Corporation Tax or not. For instance, if a profitable IT company spent £50,000 on software which related entirely to developing equipment to improve internet connectivity, then this cost will most likely receive a 130% tax credit. Thus, the Profit and Loss Account would effectively show £115,000 of costs in relation to software and as such the remaining profit would be smaller; meaning less corporation tax will have to be paid. Alternatively, as is common for companies investment in R&D, if the IT company made a loss of £20,000 during a period where R&D expenses of £10,000 were sustained, they can claim an R&D cash credit. This is calculated by applying the lower of the loss or the R&D expense (£20,000) against the R&D credit when multiplied by 130% (£23,000). HMRC will allow you to claim a cash credit by multiplying the £20,000 by 14.5%, resulting in a £2,900 cash payment. On the other hand, you can carry forward any losses to the next accounting period. This cash payment is made via a bank transfer once the R&D tax credit claim is approved.

What Does It Mean For My Company?

Research and Development tax credits can help your company’s long-term product range and ensure your company has sustainable growth. Moreover, it can help save you thousands of pounds in corporation tax each year. It’s important to note that R&D has a wide definition for this purpose and we have had great success helping people who have invested in IT projects, such as the building of systems, apps, software interfaces or CMS systems. To ensure that you can take advantage of R&D tax credits, contact Wisteria’s tax team on 020 8429 9245.

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