How Much Is An R&D Tax Credits Claim Worth To An SME?

Could your SME be due thousands in innovation funding?

Encouraging innovation is essential to a healthy economy and the government has recognised this for a long time. As a result, back in the year 2000 it launched the R&D Tax Credits scheme as a way of strongly incentivising British companies to innovate and grow. It’s a scheme that’s incredibly generous - because after all, a growing, innovative company will generate ever more cash for the government coffers.

R&D (research and development) Tax Credits are open to all sizes of company, regardless of the industry it operates in. Having said that, some industries clearly lend themselves more to the incentive than others, with manufacturing, pharmaceuticals, IT organisations and construction being particularly big claimers.

In this article we look specifically at small and medium size enterprises in particular, including how much they can claim and how.

The R&D Tax Credits scheme in brief

R&D Tax Credits mean that SMEs can in fact claim back up to 33p for every £1 they’ve spent on R&D work. It’s valuable indeed, however the exact amount will depend on a number of factors which we’ll look at further down.

SME R&D Tax Credits work by providing an enhanced deduction to reflect your R&D expenditure, in effect substantially reducing your Corporation Tax bill. Typical eligible R&D costs include:

• Staff and subcontractor costs
• Payments made to freelancers and volunteers for clinical trials
• Employers’ pension and NICs
• Any consumables used up in the R&D process itself, such as light, power, heat and water (this can be difficult to apportion correctly, which where our team of experts can help)
• Certain types of software
• Materials used up in the R&D work

Your exact return will depend on the specific costs included in your application. But as an example, a company that has spent £500,000 on an R&D project could receive up to £123,500 back (as an estimate).

R&D claims can also be made retrospectively for any R&D work completed over the last 2 years.

The above list is by no means exhaustive and some eligible costs are far from obvious. If you then inadvertently miss these off your claim you could end up losing out on the full award you’re entitled to. This is why working with a specialist R&D funding consultancy like Myriad Associates is so important.

Can a loss-making SME claim R&D Tax Credits?

Yes, it can. The SME R&D Tax Credit scheme also allows loss-making companies to claim a payable credit in three cash instalments. At this point you might find our article Is It Worth Claiming R&D Tax Relief For A Loss-Making Company? useful.

What is an SME for R&D Tax Credit purposes?

According to HMRC criteria, to be an SME for the purposes of claiming R&D Tax Credits a company must:

• Have 500 employees or fewer and
• An annual turnover of less than €100 million, or
• A balance sheet of no more than €86 million

However, like most things in this incredibly complex area of tax it's not as straight-forward as it seems. There are certain situations where an SME will need to claim under the less generous RDEC scheme, for example if it has previously benefitted from state aid funding or if it is connected to other companies.

There are many pitfalls, which is why if you think you may be eligible for R&D Tax Credits you should first get in touch with the friendly expert team at Myriad Associates to discuss your options.

In this COVID-19 era, it’s about far more than money

Of course, the title of this article is “How much is an R&D tax claim worth to an SME?” - and worth can be measured in far more than just money. The financial boost that R&D tax relief brings to SMEs can literally help them stay afloat in these incredibly difficult times. It can mean boosting their reputation, shoring up stock, creating an advertising budget, retaining staff, clearing debts and paying commercial rents.

It’s well documented that SMEs are hard to sustain even in the best of times, with around 60% failing in their first year. As the relief awarded via R&D Tax Credits can be spent exactly as the company likes (and many in fact plough it back into new innovative projects), it’s the chance for SMEs to not just survive but to thrive too.

How to make a claim

R&D Tax Credits aren’t awarded by HMRC automatically - you’ll need to build a claim separately that meets all the criteria. Claims are therefore supplementary to your CT600.

There are a couple of ways you can approach this; either you can make an R&D Tax Credits claim at the same time as filing your CT600, or, you can make an amendment to it later on. Believe it or not, we actually recommend the latter option as it can speed things up - again, contact us to discuss.

And to make your claim itself? Use the Tax Cloud portal

With COVID-19 wreaking financial havoc across just about all UK industries, now is the ideal time to claim R&D tax relief funding.

Perhaps your company has developed a brand new product, process or service from scratch? Or maybe it has taken something already on the market and significantly improved, expanded or upgraded it?

If a technological or scientific challenge has been addressed in the process of your work, then R&D Tax Credits will likely follow.

Our Tax Cloud portal for businesses has long been a popular, cost-effective and hassle-free way of putting together and submitting an R&D Tax Credit claim. It’s free to use (fees are only payed once the relief has been awarded) and is fully guided so you know nothing has been left off. Simply follow the step-by-step process to input your figures and craft a technical report that exactly meet’s HMRC’s strict criteria. And of course, our team are on hand at all times if you need further questions and guidance.

We’ll even submit your claim on your behalf and if HMRC raise any questions we’ll deal with those too. Not convinced? See our recent article on Why Your Business Needs Tax Cloud.

Sign up to the Tax Cloud portal or speak to our team on 0207 360 4437. Of course, if you prefer you’re also welcome to drop us a message.

Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud