As an SME, R&D work is often essential to improving efficiency and growing the business. Receiving a cash payment or a reduction in tax liability due to R&D tax relief is a great way to help offset the cost of R&D projects.
R&D tax relief for SMEs
The SME tax credit scheme is the primary avenue for SMEs looking to claim tax relief on their R&D work. SMEs consistently make up the majority of businesses claiming R&D tax credits in the UK, and the most recent data from the ONS confirms this. During 2020/1, 76,225 of the 85,900 total R&D tax credit claims made were submitted by SMEs. Furthermore, this year saw the amount of relief claimed through the SME scheme increase by 25% on the previous year.
The scheme grants tax relief at a total of 130% of a company’s qualifying R&D costs. As the amount of relief is proportional to the money spent on qualifying R&D work, the scheme rewards companies who invest more in R&D.
Related: R&D tax credits – the ultimate guide for SME businesses
R&D tax credits do come with complexities, so we have compiled these six insider tips to help equip you to deliver the maximum benefit to your client.
6 top tips for SMEs to make the most out of R&D tax credit relief
- Understand the size and structure of your client’s business.
According to HMRC, to qualify as an SME, there are a few criteria businesses must meet:
- Employ fewer than 500 people and,
- have a turnover of less than €100m or;
- have a balance sheet worth less than €86m.
The size of your client’s business is important as it will inform which scheme they can claim through, affecting the percentage of tax relief. The ties your client has with other businesses, such as linked companies and partner companies, can also affect their claim.
- A linked enterprise is one that owns more than 50% of another business.
- A partner enterprise is one that owns between 25% and 50% of another business.
Company structure is a significant consideration as the employees, turnover, and balance sheet will affect the calculation of the size of the applying business for R&D relief.
2. Be certain of what your client can claim for
Arguably, the most important aspect of R&D tax credits is identifying your client’s projects that qualify as R&D, as well as the eligible costs. Seeking expert insight into the R&D projects will go a long way in maximising your client’s claim.
Take the time to read through HMRC’s guidelines of qualifying R&D projects.
3. Utilise your client’s losses
Loss-making SMEs are able to gain a tax credit through the SME scheme by surrendering their losses. As a result, SMEs can benefit up to 14.5% of the total loss surrendered. This system can provide a valuable short-term cash injection for SMEs experiencing a downturn.
Do note, though, surrendering losses is not always the best decision going forward. If your client expects to become profitable again the following year, surrendering their losses will remove the option of using these losses to offset future Corporation Tax.
4. Make sure your technical narrative is top-notch
The technical narrative is the main written element of an R&D tax credit claim. In it, you need to explain how each project within the claim seeks to overcome technological uncertainty through R&D work. If your client is claiming R&D tax relief for up to three projects they will need to provide full details of each. If they are claiming for four or more, at least three will need to be described in detail (up to a maximum of 10) which together need to cover at least 50% of the qualifying R&D costs within the claim. This is part of HMRC’s R&D tax relief guidance for SME businesses.
Here are some key tips for writing the technical narrative:
- HMRC isn’t interested in the project’s managerial or logistical challenges – keep the focus on technical issues/advances.
- Refer back to HMRC’s definition of qualifying R&D and make sure you’ve explained clearly how your client’s project meets these criteria. Eg. sought an advance in science or technology, had to overcome scientific or technological uncertainty, and could not easily be worked out by a professional in the field.
- Simple is best – short technical narratives are by and large easier to review by HMRC. For the same reason, avoid using jargon that is specific to your client’s field.
- Include details of unsuccessful projects – these demonstrate R&D work just as much as successful ones.
5. Review the claim before submission!
This almost goes without saying but because it’s so important, we’re saying it anyway! Mistakes or inaccuracies at any stage of completing an R&D tax credit claim have the potential to result in an enquiry by HMRC. An enquiry requires your client to reroute time and resources which could be better utilised.
Read HMRC’s own guide for making R&D tax credits easier for SMEs.
6. Reduce the likelihood of human error
made.simplr’s R&D tax credit software takes care of many of the complexities of compiling information for an R&D tax credit claim.
Book a demo today.
