Claim a Super-Deduction of 230% From Taxable Income

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The R&D Tax Credit Scheme was introduced in year 2000, the idea behind it to encourage investment in research in UK based companies and attract new, innovative businesses to the country. The scheme allows a business to reclaim significant tax relief on qualifying money spent on research and development for their business.

The exact scheme that a business can claim such tax relief through is largely dependent on the size of the business itself. The Small or Medium-sized Enterprise (SME) Scheme for instance, applies to companies that have less than 500 employees and either a balance sheet of under €86 million, or an annual turnover under €100 million. For qualifying businesses, the scheme offers valuable incentives for both tax-paying and loss-making SMEs. For businesses in profit that pay tax, they can claim a super-deduction from taxable income of 230% of the qualifying total of the funding spent. For loss-making businesses, usually start-ups, they are potentially given the option to surrender that super-deduction for tax credits, which can be worth up to 33.35% of the qualifying total money spent.

However, despite the scheme being in place for 16 years, few companies are claiming the full amount they are entitled to, and many are claiming nothing at all from the scheme. In fact, several surveys have revealed the extent of this and it makes for stark reading. A Baker Tilly survey of 750 SMEs showed that just 15% were even aware of the R&D Tax Credits scheme, while HMRC’s own figures show that less than 45% of eligible businesses claim at all.

This shows that there are an alarming number of businesses either unaware of the opportunities available to them, or failing to take full advantage of the tax advantages R&D investment can bring. However, one of the major reasons for SMEs failing to take advantage of the scheme is that it has complex rules that are difficult to get to grips with. The upshot of that is that many simply ignore the scheme altogether

Much of the confusion comes from the description of the kind of R&D funding that is actually eligible for the scheme. The HMRC guidelines for the scheme state that qualifying projects “must seek to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty”.

The problem here is that many organisations simply think that this means creating a viable fusion reactor or some other example of world changing technological advancement. However, that is not really the case, the criteria are actually much broader, most new products require research and development, and a very large portion of them will actually qualify. The key phrase people get caught up on is the mention of highly innovative. The thing is, if your new product is filling a need that others simply have not met, or meeting that need in a better way, if it is increasing sales against the competition, then that is innovation. You do not have to be changing the world, advancing your product is innovation in itself.

The other thing that the various data points revealed was that of those businesses who did make a claim under the scheme, many failed to claim everything they could. This seems initially unusual, taking the trouble to make a claim, most would make sure they maximised that effort. However, the problem here is the scope of the costs of R&D. We tend to underestimate just where those costs end. For instance, software research and development will include a team of software engineers, and you may claim for the cost of those engineers’ salaries as your R&D costs. But what about their equipment, the energy costs associated with that team, management costs of organising and maintain the team and so on. R&D costs cover such a broad scope it is perhaps easy to see why many fail to claim for everything.

The R&D tax credit scheme is a great idea, encouraging investment and innovation, but it is only of use if businesses take advantage of what is on offer. Making sure you claim if you can, and take into account the entirety of the expenses incurred through R&D activity can make a real difference to your product development planning in the future

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