R&D tax credits are a huge boon for businesses of all sizes in the UK. As your client’s accountant, however, it is important to know exactly how R&D tax credits support companies.

Financial assistance is especially important in current times. As the economy continues to recover from the effects of the Covid-19 pandemic, many businesses still require support. Continue reading to find out what your client is potentially missing out on.

How R&D tax credits work

In order to encourage UK businesses to invest in R&D projects, HMRC offers R&D tax credits as a form of financial incentive. To this end, R&D tax credits provide a refund on Corporation Tax, a cash credit, or a combination of the two. The extent of this monetary benefit is based directly on the company’s qualifying R&D expenditure.

For small to medium-sized businesses there is the SME scheme. Applying to this will allow your client to claim back anywhere up to 33% of their R&D costs. For large companies, the RDEC scheme provides a maximum benefit of 13%. 

It is important to note here that the support offered by R&D tax credits comes as a percentage of qualifying R&D costs. This means the more R&D work your client undertakes, the more benefit they will receive. Additionally, being able to accurately identify all of your client’s R&D costs will ensure their claim is maximised. So far, £3bn has been confirmed as being claimed during 2018/9 through the SME scheme, with £2.4bn of relief being given through the RDEC. This data is still being collected and as such, the ONS estimates that the total R&D tax credit benefit for 2018/9 will be around £6.3bn.

Read about the types of work that qualifies as R&D.

Ways R&D tax credits support businesses

1. Growth and expansion. R&D tax credits have consistently been claimed more by small and medium-sized businesses than large companies. This is because R&D tax credits offer a form of income outside of traditional business means. As such, R&D tax credits are often complementary to young businesses, or small companies looking to expand. It supports them in this instance by improving business cash flow. This is a critical area of support for businesses looking to expand, as output often exceeds input when making levelling up purchases. This is particularly true for startups, who are often faced with many unforeseen costs to boot. Read more about the cash flow benefits of R&D tax credits.
2. The creation of an innovation cycle. Savvy business leaders and accountants can make the benefits of R&D tax credits go the extra mile by reinvesting them in the company. In this way, the initial investment in R&D can generate R&D benefits over and over again for little extra investment. This is because these subsequent R&D projects themselves generate more benefit through R&D tax credits. The end result is a self-generating cycle of innovation supported by R&D tax credits. All the while, your client’s business, product and processes are becoming more efficient. Here are some of the ways businesses can reinvest the money received from R&D tax credits:
   • Purchasing new equipment: Buying or renting production equipment can come with a hefty bill. However, this equipment may be necessary to increase the speed and efficiency of business and/or production processes. Furthermore, not being able to access new equipment might be holding your client back from conducting R&D work.
   • Funding subcontracted work: Outsourcing work can let your client utilise experts in their field outside of their business. Some businesses may prefer to subcontract rather than expand their team. Don’t worry though, subcontracted R&D work still qualifies for R&D tax credits.
   • Recruiting new talent: Building a team of leading experts in your field will invariably lead to a higher quality of output. This is also likely to facilitate new R&D ideas. 
   • Developing improved processes: A classic example of qualifying R&D, businesses often reinvest in improving their existing products and processes. This supports the business greatly as it increases productivity and profitability.
3. R&D tax credits can provide support to un-profitable businesses. Many people think that R&D tax credits are reserved for profitable companies but this is a misconception. In fact, if your client is unprofitable, they probably need the support of R&D tax credits more than if they weren’t. Under the SME scheme, companies can surrender their losses to HMRC in exchange for a cash credit. This provides £145 per £1000 of loss surrendered. If your client needs a quick cash injection, this avenue can provide that support. R&D tax credits can be claimed on unsuccessful projects as well. Read about how here.
4. Alleviate debt. Many businesses have taken on debt in the form of loans during the Covid-19 pandemic. R&D tax credits provide the funds necessary for your client to remove debt pressure. This supports the business in the long term by making its cash flow position more secure. Startups often naturally incur debt through innovation and expansion efforts, which is another reason R&D tax credits are beneficial for them. 
5. The ability to claim retrospectively. R&D tax credits are claimable on any qualifying projects from your client’s last two accounting periods. What’s more, your client can even claim after their tax return has been filed. An accounting period is typically 12 months long, meaning businesses can access R&D benefits two years after the R&D work took place. Therefore, even if your client doesn’t have the funds to conduct R&D right now, they can still claim for previous qualifying work.

Support your client with made.simplr

At made.simplr it is our mission to support your client to the best of our ability. Utilising our online R&D tax credit portal software will make sure their claim grants them the maximum benefit available.

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