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In today’s increasingly cutthroat operating environment, businesses are no longer vying with just other companies in the local industry. They’re also locking horns with a range of agile international competitors that are able to leverage digital connectivity, cost-effective resources, and streamlined infrastructures to offer clients a greater diversity in choice and pricing. Faced with these sorts of challenges, businesses are forced to innovate in order to drive growth and increase revenue.

In the UK, over half of big business leaders believe that innovation is crucial to their continued success over the next couple of years, and the UK government seems to be in agreement with this assessment as well. In order to enable more effective growth in scientific knowledge and technical skills throughout the region, the HMRC has instituted a research & development tax credit, which reward local companies for their investments in new products, service and business processes.

Who Qualifies?

  • Organizations of any size are eligible for the R & D tax credit, from multinational corporations based in the UK to SMEs.

 

  • The tax relief isn’t just limited to traditional laboratory research. Any business pursuing scientific or technological advancements can qualify.

 

  • A range of software development projects are eligible for relief including:
    • Purpose-built software that provides specific features or functionalities for a new project.
    • Tools that extend or enhance the functionality of an existing application, database software or operating system.
    • New techniques for recording, storing, communicating or protecting data.
    • Applications for existing hardware that extend the existing functionality of the hardware.
    • New applications that help to integrate existing systems.

 

  • A number of manufacturing and engineering projects may also qualify:
    • New products developed using CAD tools.
    • Improving or updating existing products.
    • Investment in more efficient or cost-effective operational processes.
    • Changes to production workflows that save time and money in the manufacturing process.
    • Enhancing processes to meet regulatory requirements.
    • Research into new materials that may enhance product quality, or facilitate the manufacturing process.
  • The project must advance understanding in your sector in some way.
  • Loss-making entities qualify.
  • You must be able to prove some element of uncertainty or business risk in relation to the expenditure. You should have documented evidence showing the obstacles you faced, and the steps you took to overcome them through research and development.

The Benefits

Currently, R& D tax relief can be sorted into two forms.

SMEs

Businesses with less than 500 employees and a turnover of less than €100m will usually qualify for more generous compensation under the program, as ownership issues can make tax relief for corporations more complex. Under the terms of SME tax credit, businesses are eligible for an additional 130% deduction from taxable profit based on qualifying expenditure. As all R & D costs can be claimed as deductions anyway, the total tax relief amounts to 230%. If the business is in loss, it can claim a tax credit worth up to 14.5% of the loss amount.

As of 2015 – 2016 the average amount of relief claimed by businesses under the program amounted to £61,514. However, only 22% of businesses in the sector managed to apply for the scheme. A strong record keeping system that can accurately track R & D expenditure should allow these companies to gain further benefit from the tax credit.

Large Companies

Under the Research and Development Expenditure Credit (RDEC), companies can claim R & D relief as a government grant on their annual accounts, meanwhile loss making entities can claim cash back from the HMRC directly.

As of April 1st 2015 the scheme provided large companies with £900k of tax credit on £10m qualifying expenditure at a 20% tax rate.