R&D tax credits, originally introduced in 2000, can provide your small or medium-sized limited company with up to 130% in additional tax relief – an amount certainly not to be sniffed at!
As the UK continues to strive to be a centre of innovation and technology, we are seeing more and more companies take advantage of the relief, which in some cases has resulted in reductions in corporation tax bills or refunds amounting to tens if not hundreds of thousands of pounds. So, how does it work?
First of all, the relief is only available to companies which means for start-ups, getting your business structure right could be critical if you think you might be eligible to take advantage. The relief is not available to sole traders or partnerships.
Secondly, the enhanced relief discussed here is only for SME companies, being those with:
- fewer than 500 employees, and
- either annual turnover of less than €100m, or a balance sheet total not exceeding €86m.
- Larger companies have their own, less beneficial, relief.
The expenses must relate to work on a specific project to make an advance in science or technology and must relate to the company’s trade or intended trade. You must be able to show that the project:
- looked for an advance in science and technology;
- had to overcome uncertainty;
- tried to overcome this uncertainty (but need not be successful); and
- couldn’t be easily solved by a professional in the field.
Qualifying expenditure includes:
- Staff costs;
- software or consumables;
- subcontracted R&D costs; or
- externally provided workers.
Once calculated, the additional 130% of the qualifying expenditure is deducted from the company’s taxable profits when preparing its corporation tax return, on top of the usual 100% deduction, giving a total deduction of 230% of the qualifying R&D expenditure.
For many start-up businesses, this may give rise to a taxable loss, which can then either be carried back to the previous year (where it was profitable) to obtain a refund, carried forward against future profits to reduce future tax payable or surrendered for a 14.5% cash credit – often a much welcome cash injection for a developing business.
This article originally appeared in the June/July edition of Wiltshire Business