The word ‘innovation’ has become the buzz word of the 21st Century – even though its importance isn’t entirely new.
Thanks to the great success stories – like Elon Musk at Tesla and SpaceX – innovation is now much higher on the business growth agenda.
Innovation has historically been something driven by bigger organisations; after all, these larger companies have more time, bigger R&D budgets and the best people. The trouble with that way of thinking is that it stifles the essence of what innovation is all about – making something new or doing something in a different way.
Because this often requires a fresh set of eyes or a new way of looking at things, it shouldn’t be restricted to just a few minds. The good ideas shouldn’t just come from those who can afford the “thinking” and “development” time.
Often, fresh ideas are coming from smaller businesses and R&D is just one of the challenges facing SMEs today.
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- SMEs uptake of R&D Tax Credits
- What is the R&D Tax Credit Scheme?
- Who can claim?
- R&D Tax Credits vs grants
- Planning
- Limitations
- Get help
Aware of the significant cost and impact R&D had on SMEs, HMRC introduced the R&D Tax Relief scheme in 2000/2001 with the idea that it would, “…benefit companies striving to achieve technical and scientific advances through projects that extend the current industry baseline, and where uncertainty in the outcome exists and the methods used to achieve success are not readily deducible.”
SMEs drive uptake in R&D Tax Credits
In 2016-17, the most recent period for when complete figures are available, the total number of claims for R&D tax credits rose to 52,335, an increase of 20% from 2015-16, an increase driven primarily by a rise in the number of SME claims. R&D tax credit claims from SMEs totalled 45,045 in 2016-17, an increase of 22% from the previous year.
The total amount of R&D support claimed increased to £4.4bn against total R&D expenditure of £32.8bn in 2016-17, an increase of 14% from the previous year. As of October 2019 48,635 R&D Tax Credit claims had been made.
By UK region, R&D claims are concentrated in companies with a registered office in London, the South East or the East of England but it’s important to remember that the regional split is based on the registered head office location so may not be where all of the R&D activity takes place.
The greatest volume of R&D tax credit claims come from the manufacturing, professional, scientific and technical, and information and communication sectors – a total of 68% of claims and 73% of the total amount claimed for 2017-18. Between 2000-01, when the R&D tax credit schemes were launched, and 2017-18, over 300,000claims have been made and £26.9bnin tax relief claimed.
So, SMEs are taking up the scheme but that take up is still relatively low when you consider that there are 5.9 million SMEs (99% of all businesses) in the UK.
You can find out more about the HMRC statistics here
What is the R&D Tax Credit Scheme?
R&D tax credits are a tax relief designed to encourage greater R&D spending, leading in turn to greater investment in innovation. They work by either reducing a company’s liability to corporation tax or by making a payment to the company. There are three schemes for claiming relief: The Small or Medium-sized Enterprise (SME) Scheme; The Large Company Scheme; and Research and Development Expenditure Credits (RDEC). The Large Company Scheme is no longer available.
Who can claim?
A SME may claim a higher rate of relief than a large company. Also, a SME which has no tax bill to reduce may claim a cash payment instead.
R&D Tax Relief applies to both profit making companies paying Corporation Tax and to loss-making companies that are not. The relief can be received as lowered Corporation Tax or, in some cases, a cash credit. And, although it is obviously a more complicated beast, based on a variety of factors, it typically amounts to around 26p for every £1 you have spent on eligible activities.
R&D Tax Credits vs grants
Despite the growth in claims, due to several factors, not least general awareness of the relief, the number of SMEs taking up the scheme is not as great as you would expect. Some of this comes down to a lack of strategic and financial business planning where business owners take a more reactive approach. This can become a problem when it puts other, unforeseen, limitations in place for future options.
Grants, for example, have long been a go-to finance option for the average SME. And why not? The promise of ‘free money’ and ‘no strings’ is of huge appeal to a business that can’t afford loan repayments and don’t want to (or can’t) give away equity.
In the case of the R&D tax relief however, if the grant you have received is classified as state aid, then you cannot claim R&D tax relief for the same project. And, if the grant is not state aid, there are still some restrictions that will likely impact the percentage of relief you do in fact receive.
Planning
What this highlights is the importance of forward planning. The requirement for you to look beyond what is feasible and appealing in the short term, and what may be more beneficial in the long term; by giving you more options.
Many business owners and leaders, whilst confident with the practical day-to-day running of their organisations, are not 100 per cent certain when it comes to matters of financial planning.
And they need not be.
Limitations
There is an unspoken myth that business people come to believe where they feel the need to ‘master’ all areas of their businesses. It is simply not feasible. In fact, the most successful business leaders are those that understand their own limitations and proactively seek out the knowledge they require; well in advance of when they need it.
For example, another area that often catches out those applying for R&D Tax Relief is in claiming directors as sub-contractors. Sadly, this is not allowed and it is checked carefully by HMRC. Neither can you claim directors’ dividends against the qualifying expenditure. And consideration also needs to be given to whether you file qualifying development expenditure under ‘Tangible Assets’ or ‘Intangible Assets’. It all comes down to what you are making, and what percentage claim you can make against the cost as a result. But knowing the finer details, ins and outs and what that means will help you to get the best possible percentage relief for your claim.
Get help
Ultimately, you need to remember that this is a tax relief and, to ensure that yours is a legitimate claim, there are certain boxes that need to be ticked, ‘I’s to be dotted and ‘T’s to be crossed. And whilst there is a question as to whether enough SMEs are claiming for their investment in R&D, there is also a question as to whether those claiming and qualifying are receiving all that they are entitled to because of how they have chosen to make their claim.
For us the message is simple. This is a finance and tax related matter so, if in doubt, seek assistance. Not just with the practicality of completing a form, but as part of your strategic planning for the future. If you are looking to invest in R&D, new machinery, premises, staff or simple growth capital, take the time to speak to a professional advisor. Their broader knowledge of the industry and options could prevent you from making an expensive decision.
If you are interested in finding out more about R&D Tax relief, please get in touch. Our specialist R&D Tax Relief advisors will be able to check your eligibility and help you through the application process.