The Business Statistics briefing paper, published in January 2021, reveals there were approximately 6 million small and medium-sized enterprises (businesses with less than 250 employees) operating in the UK in 2020. These figures show that small businesses, which for the purposes of R&D tax credits also includes micro-businesses (less than 10 employees), accounted for 99% of all businesses in the UK.
It is not surprising then that small businesses submitted the vast majority of R&D tax credit claims in 2020-21. Data from the Office for National Statistics has the number of SME scheme claims at 76,225, a 16% increase from the previous year. The range of small businesses operating in the UK is vast, and naturally, the effects of tax relief for each individual company varies considerably. But in light of these statistics, it’s worth taking a look at some of the influences the R&D tax incentive has on small businesses.
The defining characteristics of small businesses
To understand the effects and influence of R&D tax credits on small businesses, we need to be cognisant of their priorities, pitfalls and how they operate.
- Less annual revenue: Small businesses often deal in small-scale operations. By definition, the numbers involved in these companies’ projects are smaller. This doesn’t mean they are less likely to be profitable, but it can often mean that their cash flow is monitored more closely.
- Largely a sole proprietorship or partnership: Small businesses are usually managed by an individual or a few individuals. One significant implication when it comes to tax relief is that the business’s earnings and expenditures can often be found within the owners’ tax returns.
- Limited reach: In a lot of cases, small businesses operate out of a single location which might even be the owner’s home – a home baking business or local retail store, for example. As a result, small businesses often serve their local surrounding area and do not branch out to other parts of the country.
HMRC is absolute in its definition when it comes to the size of a business, making it easy to determine if your client falls into the small business category. This, naturally, has implications for their R&D tax credit claims, as well as informs which scheme to apply for. All HMRC’s guidelines on R&D tax relief for SMEs can be viewed on this link.
What is an R&D tax credits?
R&D Tax credits create a reduction in corporation tax a business is liable for.
The main benefit of the government’s R&D tax incentive scheme comes in the form of corporation tax reduction, however, tax credits are also available for loss-making companies. The SME scheme allows loss-making companies to surrender their losses and in turn, receive a cash credit worth 14.5% of the total loss surrendered.
Effects of R&D tax credits on small businesses
When it comes to a small business, R&D will often focus predominantly on improving products and creating new ones. Here are some of the positive influences R&D tax credits can have on small businesses:
- R&D becomes more accessible: R&D work often comes with risk in the form of significant amounts of cash investment. This risk is sometimes amplified for small businesses where access to capital might be limited. R&D tax credits reduce the financial risk associated with R&D projects by ensuring an additional return on investment. If this return comes in a monetary form, the business is free to employ the funds however they see fit. This could be used to reinvest in further R&D, thereby covering some of the initial investment.
- Source of short-term funding: HMRC aims to pay out R&D tax credits to small and medium-sized companies within 28 days of claim submission. It can then take up to 10 days from when the claim is approved for your client to receive the money. While other factors might affect the repayment time of R&D tax credits, such as peak claiming periods and seasonal variance, it is still a relatively quick turnaround.
- Complementary to other forms of government funding: You can still claim R&D tax credits if you have received other government funding. However, if the funding is classed as ‘notified state aid’, your client will have to claim through the RDEC scheme. This is because SME tax relief counts as notified state aid, and a company cannot receive two different types of notified state aid for a project.
Related: The basics of the RDEC scheme explained.
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