R&D tax credits: A boon for small businesses

All businesses have a lot to gain by pursuing an R&D tax credit claim. However, there are a number of reasons that make them a great boon for small businesses in particular. The additional funding that small businesses can access through R&D tax credits is a large part of this. The way small businesses are able utilise and benefit from these funds goes a step further though.

It seems more and more small businesses are picking up on the boon of R&D tax credits. The number of claims made by small and medium-sized businesses has been on a mostly upward trend since the inception of R&D tax credits two decades ago. For example, in the financial year 2010-11 the number of claims through the SME scheme was 8,280. In the most recently recorded data from 2018-19 this number was 52,160.

Read on to find out the extent of the boons available to small businesses through R&D tax credits.

How to define a small business

For the purposes of R&D tax credits, there are exact parameters that small businesses must meet. This definition of a small business comes directly from HMRC so it is important to be aware of. To qualify as a small business a company must have:

  • Fewer than 500 employees.
  • A turnover of less than €100m.
  • A balance sheet of no more than €86m.

There are some other requirements that your client’s business must fulfil in order to qualify for R&D tax credits, however. They must be:

  • Based in the UK and subject to UK corporation tax.
  • Attempting to solve a scientific or technological uncertainty.
  • Spending money directly on R&D endeavours.

These apply to all companies looking to claim R&D tax credits, so keep this in mind even if your client helms a large company.

The SME scheme

As its name suggests, this scheme is only available to small and medium-sized businesses. The SME scheme allows these companies to claim back a percentage of their qualifying R&D costs. This amount is then deducted from the company’s yearly profit, thereby reducing the amount of corporation tax the business is subject to. This saving is also deliverable as a cash credit as opposed to a tax refund, or a combination of the two.

By using the SME scheme, a small or medium-sized business is able to benefit from a refund on 100% of their qualifying R&D costs. This then receives an enhancement of a further 130%, bringing the total deduction to 230%. Under the SME scheme,the benefit given this way goes up to 33%. This translates to up to 33p per £1 that the company spent on qualifying expenditure. Depending on the amount of R&D your client is conducting, this benefit can amount to tens of thousands of pounds.

A caveat to the scheme is that the maximum benefit of 33% is reserved for profitable SMEs. Don’t worry though, loss-making SMEs can still benefit from R&D tax credits by using the scheme. To do this they must surrender their losses. In exchange for the losses, HMRC offers loss-making SMEs a cash credit. The maximum benefit available to loss-making SMEs is 14.5% of the surrenderable losses.

This is not to discount the benefits of R&D tax credits for large businesses though. Large businesses can claim R&D tax credits using the RDEC scheme, which you can read all about here.

Benefits of R&D tax credits for small businesses

  1. Business development and growth. As outlined earlier, R&D tax credits provide small businesses with a financial benefit. One of the key ways your client can use this funding is to grow their business. Costs such as hiring new staff, expanding premises and outsourcing work all contribute towards the leveling up of your client’s business.
  2. Increased efficiency and productivity. This next point sounds obvious but R&D tax credits incentivising R&D work among SMEs is a great boon for them. This manifests by increasing the efficiency of business operations. For example, a new production method may now be cheaper and take less time due to the use of different materials.
  3. A welcome cash injection in the early years. Almost all startups will begin as small businesses. These early years tend to be turbulent, particularly in terms of unforeseen costs. As a result, the financial boon of R&D tax credits is especially welcome for these companies. Read more about how to claim R&D tax credits if your client is a startup. What is more, the early stages of a business invariably involve trial and error. Products might undergo new iterations and various processes might get tweaked. These naturally occurring changes are likely to qualify as R&D, which is one reason SMEs are able to benefit more from R&D tax credits than large ones.

The degree of benefit available to small businesses is directly proportional to the amount of R&D work they are undertaking. However, this assumes that all of the qualifying costs are correctly identified and included within their R&D tax credit claim. Read about what expenses qualify for R&D tax credit

Because identifying what does and doesn’t qualify as R&D is difficult, it often pays to get help from expert third parties. Here are 4 ways to find out whether your project qualifies as R&D. Speaking of experts though…

Ensure a maximised benefit by using made.simplr technology

Although understandable, small businesses are often too preoccupied with their day-to-day running to pursue financial boons such as R&D tax credits. However, small businesses are more likely to be completing qualifying R&D work unbeknownst to themselves. 

Fortunately, your client doesn’t have to go it alone. made.simplr’s R&D tax credit claim portal software can help by taking all the time and effort out of completing a claim. Utilising features like Xero integration, analytics and management systems removes any risk of errors. The end result is a claim which is 100% accurate and reviewed multiple times by R&D tax credit experts. Look no further to guarantee the maximum financial boons for your client. 

Book a demo today!

content team

Our Content Team is the R&D specialised, curious and thorough group behind made.simplr's blog and R&D resources, covering topics of interest to the R&D, accounting and innovation world.

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