Research and development (R&D) is “crucial” for any business that wants to remain innovative and keep ahead of the competition, says Business Matters Tips and Advice. In recognition of the value of R&D, in 2000 the Government created valuable R&D tax credits for small and medium-sized enterprises (SMEs). Yet many firms still believe that to qualify they have to be large-scale manufacturers. This is not the case: to qualify for SME tax credits, a business must have fewer than 250 people and an annual turnover of less than e40m (approximately £25m). The balance sheet total needs to be below e27m (about £17m) and the firm cannot be a member of a large group.
The good news is that you can claim R&D tax credits for almost any innovations, even if this just means improving your packaging. Scientific research also qualifies, and there are no restrictions on where the R&D is undertaken. The qualifying R&D spend must exceed £25,000 a year and all of the costs must be capital expenditure.
That means you can claim tax credits on the costs of those staff directly involved (if they spend more than 80% of their time on the project, you can reclaim all their costs). Better still, the Chancellor has proposed that the qualifying spend threshold be lowered to £10,000, a move which should shortly get EU approval.
There are two ways to claim for R&D spend incurred after 1 April 2000. The first is to offset 150% of the expenditure against your taxable profits, reducing your tax bill. A loss-making firm can also do this – the tax relief is incorporated into the loss, which can be carried forward from previous years to set against any future taxable profits in the usual way. The second is to claim a 24% refund for any R&D expenditure. This sum takes the form of cash back to the company and is capped at the amount of PAYE/NIC paid to the taxman in the same period. If the firm has incurred a loss during that time, it can choose to receive a cash payment instead of registering the loss to offset against gains in the future.