Research and Development, or “R&D”, can conjure up an image of laboratories and people in white coats, but it doesn’t have to be like that.
And, if your business is undertaking and R&D, it can have a big impact on your tax bill as R&D credits are one of the most valuable tax reliefs around.
WHAT IS R&D?
R&D is when you develop something innovative and new. This can be a new product but could also be a new system or process – a way of making things quicker or better within your business or for others.
And what is the effect? If you have developed a new product, system, or service, you may be eligible to claim Research and Development credits. If you claim these credits, you can increase the tax relief you receive on the expenditure.
HOW DO I KNOW IF I QUALIFY?
To qualify for the more generous SME tax credits for R&D, your business must meet the following three criteria:
- You have fewer than 500 employees
- Your turnover is less than 100 million Euros
- You balance sheet is less than 86 million Euros
Larger companies qualify for a different scheme but we’re concentrating on SMEs here.
WHAT EXPENDITURE QUALIFIES?
You need to ask yourself these three questions:
- Have you had a technical goal as part of a commercial or research project?
- Was there at least one significant technical difficulty to overcome while trying to achieve this goal?
- Did you use people with appropriate skills and experience to carry out the work?
To give some examples of claims we have seen:
- A number of clients have developed new software that can help their business, and potentially other businesses too
- We’ve seen a client develop a different type of floor surfacing
- A client that provides meal prep developed different recipes to meet specific goals
WHAT ARE R&D CREDITS WORTH TO ME?
The way this works is that for every £1 you spend, you get £2.30 deducted in your Corporation Tax return from your taxable profits.
What this actually means is that it increases your tax relief by nearly 25% of the expenditure.
To give you an example, if you spent £100,000 on a standard expense, it would reduce your tax bill by £19,000, ie 19%.
However, if you spent £100,000 on expenses that could be deemed as research and development, it would reduce your tax bill by £43,700, which is 19% of £230,000.
That’s an extra £24,700 knocked off your tax bill. So it really is well worth doing.
WHAT IF I HAVE NO PROFITS?
Even if your business is making a loss, you can claim.
HMRC will pay you 33% of the value of the amount you have spent on R&D.
There are a lot of criteria you need to fill in to be able to claim research and development credits. It can be a little bit technical, but it is something a lot of people are eligible for but don’t know about. It’s always worth checking as it can have a huge effect on your tax bill.
And it’s something that HMRC actually wants to give you as the Government is incentivising you to innovate.
So please take a look at it – we’re here to help!
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