Small firms missing out on millions in research and development tax relief

Recent statistics from the Government suggest only 5% of eligible small companies are claiming the research and development (R&D) tax relief they are due for their innovation.

The latest Government data from R&D tax relief claims made in 2016-17 found that more than 34,000 of the 39,960 R&D tax credit claims were made under the Small and Medium Enterprises (SME) scheme.

However, just 5,820 claims were made by companies making their first ever R&D tax credit claim.

The figures underline a continued misunderstanding among the UK’s small business community about what constitutes an R&D activity and how to make a successful claim for tax credits that so many innovative companies could rightly claim.

What is R&D tax relief?

R&D tax relief was introduced by the Government in 2000. It was a scheme designed to incentivise and foster innovation and creativity among British businesses big and small, underpinning the UK’s economic growth.

As of 2018, more than 240,000 R&D tax credit claims have yielded a total of £21.4 billion in tax relief for innovative and ambitious small and large companies across the UK.

R&D tax relief is, in essence, free money for small companies. The tax relief available is currently 130%. This means that for every £1 of qualifying expenditure your business spends, it receives an additional £1.30 in tax relief. Put simply, for every £1 spent, a business can deduct £2.30 against their taxable profits.

Even loss-making companies are eligible to claim for R&D tax relief. They can claim a repayable tax credit calculated at 14.5%.

What is the average claim for R&D tax credits?

The average R&D tax credit claim is said to be worth £54,000 a year, which could be a significant financial boost for profitable and loss-making businesses.

Don’t assume your small business is ineligible to claim

More than a third (35.1%) of R&D tax relief claims in 2016-17 came from companies in London, the South East and the East of England. By contrast, firms in the Midlands represented just 14.8% of the total claims within the SME scheme.

It is clear that more needs to be done to raise awareness of the benefits and eligibility criteria of R&D tax relief to the owners of SMEs in all four corners of the UK.

Many small firms aren’t even aware that their work is classified as R&D. The definition of R&D is much broader than you might think and can be applied across any sector. To qualify for R&D tax relief, your business needs to prove the following:

• Your R&D project sought an advance in science and technology
• Your R&D project had to overcome uncertainty
• Your R&D project attempted to overcome this uncertainty
• Your R&D project could not have been easily replicated by a professional in your industry

Take a careful note of the third bullet point. Your project only needs to attempt to overcome uncertainty to qualify for R&D tax credits. What does this mean? Even failed R&D projects are eligible for tax relief.

Qualifying expenditure for R&D projects includes:

• Software
• Staffing costs
• Consumable or transformable items
• Contracted costs (65%)
• External workers (65%)

Introducing Patent Box tax relief

In 2013, a new tax relief was also offered to limited companies to reduce their tax on profits made from patents. The Patent Box tax relief offers a 10% reduction on corporation tax on all income generated by patents.

Although the number of UK companies claiming Patent Box tax relief has risen since its inception, research suggests that more than half of UK companies are unaware of the scheme. The same research found that two-fifths (39%) of companies with active patents had never applied for Patent Box tax relief.

We can achieve successful R&D and Patent Box tax relief claims for your small business

If you think some of the work your small company does is eligible for R&D tax relief, or you’ve recently been granted a patent for an invention, we can help prove your eligibility and oversee a successful claim with HM Revenue and Customs (HMRC).

To arrange a free initial consultation on your R&D or Patent Box tax relief eligibility, call us on 0203 976 7177 or drop us a line using our online enquiry form.

Date published 4 Jun 2019 | Last updated 1 Sep 2019