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  • Tax relief for research and development
  • Is Research & Development tax relief on your company’s radar?

Views from the flipside

Research and development (R&D) is big business – it’s what drives innovation, altering the world as we know it.

More companies are investing large sums of money to develop their IT and infrastructure, and yet many small businesses are unaware that they could claim money back for this expenditure, potentially missing out on some real benefits.

Peter Alderson, managing director at business finance provider White Oak UK, says:

"Innovation is at the forefront of most businesses’ minds currently, especially those that are providing online services or catering for clients.

"The need to stand out is more crucial than ever before in supporting differentiation and in turn, helping to increase market share.”

This lack of awareness is particularly worrying when you consider that smaller companies can benefit from a far better R&D tax rate compared to larger players.

Small business R&D relief allows companies to deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction. Businesses also don’t even have to be making a profit, because they can claim a tax credit even if it is loss-making.

To qualify, a business must employ fewer than 500 people, and have an annual turnover of under €100m, or a balance sheet of under €86m.

The initiative is a way of supporting innovation, and essentially helps to boost business profits by channeling more money into the current tax year, helping support sometimes costly developments.

Free guide to tax

Figures show that businesses across the UK have claimed £16.5bn in tax relief since the scheme’s launch in 2000. And in the 2015/16 tax year alone, £2.9bn was paid out across all industries. It is also clear that the government has woken up to the potential of these innovative projects.

In the Autumn Budget, the chancellor announced an extra £2.3bn would be injected into R&D and increased the main R&D tax credit to 12%, up from 11%. Of course, not all innovation projects will be eligible.

To apply, you need to demonstrate to HMRC how you plan to make advancements in science and tech and demonstrate that these developments cannot easily be worked out by a professional in the field.

While companies that sit in the tech and science sectors are more accustomed to claiming these benefits, those in industries such as finance are not – with take-up still relatively low. In fact, analysis from Smith & Williamson indicates that real estate, financial services, and insurance industries account for only 1-2% of the total claims.

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IT projects are often eligible for R&D tax credits, and when you consider the developments across all industries (particularly financial services), it’s surprising that there have not been more claims.

In fact, Matt Watts, head of R&D at Smith & Williamson, points out that the average amount of money financial services firms are awarded is higher than the small business average. “This leads us to believe there are a number within the financial services sector who are missing out.”

Part of the problem could also be confusion on what constitutes R&D – the definition is broader that you might think. It’s a payment that could have a huge impact in the early years of new businesses, particularly as young firms are often under cashflow pressure.

“If the company is spending money innovating and advancing technology, a claim for R&D tax relief resulting in a cash repayment can be extremely valuable,” says Watts.

Alderson says:

“R&D tax relief should be something on every small business’ radar.

"There are a number of businesses that can assist in preparing these for HMRC, and while a successful case could take around eight weeks, businesses could explore options to finance this cost up-front – indeed our own customers have used our popular interest only facility to support this.”

HMRC noted that small businesses have made more claims over the previous year (roughly 10-20% year-on-year), and yet many companies are still missing out. More companies need to be made aware of this tax credit.

It could represent a huge financial boost for millions of UK smaller businesses.

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