Running a small business is an enormous undertaking in itself. Between keeping track of invoices, cultivating customer or client relationships, and handling most maintenance issues by yourself, most small-to-medium enterprise owners (SMEOs) are exhausted come tax season. Unfortunately, this exhaustion could lead SMEOs to overlook some valuable tax credits they’re eligible to claim. One of the most lucrative tax credit SMEOs could take advantage of R&D (Research & Development) tax credits.
First, let’s talk about R&D tax credits. Small-to-medium enterprises (SMEs) can claim these tax credits as an incentive for investing in product and service innovation. The refunds they receive, in turn, can be put back into the company itself, allowing SMEOs to grow further and develop their business. Introduced by the UK government in the year 2000, R&D tax credits have improved immensely, and their benefits are numerous. Consequently, thousands of tax creditable pounds get lost in the mix each year.
Interestingly, companies from all sectors can claim R&D tax credits, such as software development businesses, cheese-making companies, digital development firms, and construction companies. The kicker is that most of them don’t realize they’re eligible to claim these tax credits. They erroneously believe R&D tax credits are limited to laboratory testing or patentable products and processes. Furthermore, companies who are aware of these tax credits often find the tax code surrounding it too complicated to navigate, so they end up losing out on what could be a massive boost to their business.
The definition of R&D is much broader than this, though. R&D, as it pertains to R&D tax credits, relates to the innovation of new products, software, and fabrication processes. However, more activities qualify for R&D tax credits, which we will explore a little later.
What are the benefits of R&D tax credits?
Aside from the obvious, as in R&D tax credits can pour a significant chunk of money back into your business. If you qualify, you are eligible to claim up to 33% of your R&D costs, even if your project was unsuccessful.
Does my company qualify for R&D tax credits?
The most straightforward answer to this question is to hire a tax professional who can do the heavy lifting for you. However, there are three main qualifiers for R&D tax credits. First, the company must be a limited company in the UK, and must also be subject to Corporation Tax. Second, the company must partake in qualifying activities for R&D tax credits. Last but not least, the company must have invested money in these activities.
Moreover, how can you tell if your business is an SME or large business? It’s simple: an SME is defined as a business with a staff of less than 500 and either a balance sheet total of less than €86m or a turnover of €100m.
What are some everyday activities that are eligible for R&D tax credits?
Only an R&D tax credit specialist can answer this question with 100% certainty. However, some typical activities that are eligible for R&D tax credits include toolmaking, testing new materials and concepts, certification testing, developing product alternatives, streamlining internal processes, maintaining lab equipment, and environmental testing, to name several. Moreover, your company could be performing some activities that end up qualifying you for R&D tax credits, after all. Even resolving technological uncertainties in the way of deciding whether or not your newest project is possible to achieve could be a qualifying activity for R&D tax credits. The only way to know, though, is to hire that tax credit specialist.
How to show your company’s activities qualify for R&D tax credits
If you’d rather brave the murky waters of tax law on your own, then there’s a way to demonstrate to HMRC that your business and its projects qualify for R&D tax credits. First, please know that it will help immensely to give you all the details of your project when submitting a claim to HMRC. Delineating your R&D process can help HMRC determine if your activity qualifies.
When collecting the details for your claim, we recommend focusing on the scientific and technological aspects of the process itself. These details highlight your company’s primary motive for innovation and can make or break your eligibility for R&D tax credits. However, some activities, such as those related to the arts, humanities, economics, or social sciences, don’t fall under scientific and technological developments. Furthermore, a product that is only ‘commercially innovative’ will not do; a product must be innovative in the sense that it advances the fields of science and technology themselves, and not just take the lead in the market as the hottest new thing to have.
Another question you’ll have to answer while filling out your claim is whether or not any scientific or technological uncertainties were encountered. Seeing as ‘uncertainty’ is a rather broad term, HMRC definition of scientific or technological uncertainty is, “when knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, isn’t readily available or deducible by a competent professional working in the field.” Following this logic, it’s safe to assume that not every hangup you encounter throughout the R&D process can be deemed an uncertainty. For example, any disputes you may have with fellow researchers that are later resolved do not qualify as an uncertainty. Similarly, any technical problems encountered on previous projects that have since been resolved are unlikely to be considered scientific or technological uncertainties.
Fortunately, third-party companies can help assess your company to see if it’s eligible for R&D tax credits. VeritasNoble is one such company that allows British SBOs to claim over £3 million in R&D tax credits every year. Their services are not just limited to R&D tax credit claims, though; they also provide business financing and funding in addition to equipment financing. Visit their website to learn about their services and how they can help you.