Following a two year HMRC consultation the government recently announced a new plan which aims to make it easier for small businesses investing in research and development to claim tax relief.
Research and Development (R&D) investment, particular by smaller companies, is crucial for the economy’s productivity and long-term growth, and as such is actively encouraged by the government. To encourage R&D investment, and make the UK an attractive place for innovative companies to operate, the Research and Development Tax Relief Scheme was launched in 2000.
How does Research and Development Tax Relief work?
Research and Development Tax Relief works by reducing the amount of corporation tax firms pay on their profits by offsetting any income against investment in R&D. According to HMRC analysis, for each £1 of tax spent on R&D tax relief this stimulates between £1.53 and £2.35 of additional R&D investment.
Making R&D easier: HMRC’s plan for small Business Tax Relief
Despite the obvious incentives R&D tax relief is one of the most under utilised tax relief schemes. The recent plan announced by the government aims to increase the take-up of R&D tax relief, through raising awareness and simplifying the application process.
- Small companies with a turnover of less than £2million and fewer than 50 employees will be able to seek assurance in advance from HMRC on R&D Tax Relief which will enable them to invest in research and development with more confidence
- HMRC have pledged to improve its communication around R&D tax relief and to work with other government agencies to identify companies who have carried out research and development but not claimed the relief.
What is the Research and Development Tax Relief scheme?
There are two different R&D relief schemes; The Small or Medium-sized Enterprise (SME) Scheme and The Large Company Enterprise Scheme.
Small and Medium-sized Enterprise Scheme
To quality for SME relief businesses must have fewer than 500 employees and either an annual turnover of less than £100 million, or a balance sheet less than £86 million.
The SME scheme offers very generous incentives for both tax-paying and loss-making SMEs and works by lowering the amount of corporation tax small businesses play.
Since April 2015 the Small and Medium-sized Enterprise Scheme has had the highest rates of relief, allowing companies to claim 230 per cent of their R&D expenditure, which reduces the cost of R&D by 46 per cent. The previous SME and R&D relief was 225 per cent.
SMEs who make a loss can also surrender their losses and receive a payable cash relief at a rate of 14.5%, reducing the cost of R&D by around 33 per cent. Loss making companies have a choice between an immediate benefit, or carrying forward the loss to offset against income at a later date.
Large Company Enterprise Scheme
The Large Company Enterprise Scheme is for companies that are too large for the SME relief and is only available to businesses that have spent at least £10,000 a year on research and development. The tax relief on R&D is 130% so for every £10,000 spent, £13,000 can be claimed against corporation tax.
Take up of Research and Development Relief
Although the number of SMEs claiming tax relief in 2013-14 increased by around 19 per cent to over 15,000, a recent KPMG Enterprise survey found that only 5 per cent of SMEs had ever claimed R&D tax relief, and only 15 per cent were even aware of the relief meaning that a large proportion are missing out. It is hoped the new government plan will greatly increase the take up.
R&D tax relief is one of our key specialisms at Bambridge Accountants. If you are interested in find out more about the scheme and how it may benefit your company, or to arrange a free consultation meeting, contact us today.