Research and development (R&D) tax credits are a tax relief based on your company’s investment in innovative technology.
Research and development (R&D) tax credits are a tax relief based on your company’s investment in innovative technology. They can either reduce your tax bill or, for some small to medium-sized companies, offer a cash sum.
Chris Barling, CEO of e-commerce company Actinic claimed back more than £300,000 through R&D tax credits on a £3 million investment in software writing, but says the process was not straightforward.
‘Our experience was that the procedure was a bit arbitrary. We originally had our claim rejected but we went back and had a face-to-face meeting with the relevant tax inspector. We had also won an award for our technology, so we could argue that an independent review of our activities had shown that we were highly innovative.’
For Kevin Van Heerden, managing director of software company Net-Runna, the time and effort spent on claiming back R&D did not initially seem worth the effort.
After receiving £89,000 at the end of last year, Van Heerden believes that the credits can act as a crucial lifeline. ‘Without doubt it’s definitely something companies should look into. It can provide some welcome breathing space,’ he adds.
According to HMRC only 4,500 small to medium-sized businesses successfully claim R&D credits. David Marshall, director of Alma Consulting, says this amount is vastly unrepresentative of the companies eligible for relief. ‘A lot of businesses are missing out because the guidelines are so complex, running to over 1,000 pages long. I would say that more than half of the companies we see that are unsure of their eligibility actually are able to claim.’
Marshall says that part of the problem is in the name. ‘I think the term R&D is a bit of a misnomer. A lot of companies will not conduct research and development, but just development – which is enough to qualify. Most commonly the companies we find to be eligible are involved in things like product development.’
The net benefit to your company will depend on what you pay in corporation tax. To qualify in the first place you will also need to be spending a minimum of £10,000 on R&D-related costs.
Marshall estimates that the majority of profitable SMEs get back roughly 16 per cent on their R&D investment. So if they spend £100,000 on developing a project they’ll recoup £16,000.
Loss-making SMEs do better, reclaiming 24 per cent on average, or £24,000 per £100,000 spend. With amounts like these at stake, R&D tax credits could be a relief you can’t afford to ignore in such cash-strapped times.