While spending as a percentage of national income has gone down over the last few years, so too has the level of taxes as the central government attempts to reinvigorate the economy.
Corporation tax has fallen, and personal allowances have risen. Furthermore, the government has also introduced a range of new tax incentives designed to get businesses investing, growing the economy, and making life better for the average person.
For business owners like you, this is a massive boon. It means that you can reduce your tax liabilities while also spending on projects that increase the size and profitability of your firm in the future.
One of the most innovative new ideas is R&D tax credits. Here, you can claim tax relief from HMRC for any money that you spend on qualifying research and development investments. It’s a win-win.
Which Projects Count As R&D?
R&D is an expense that your firm incurs as part of its regular operation as it tries to develop new projects and technologies. You can, therefore, deduct research and development costs from your taxable income, just as you can other expenses, like utility bills. R&D tax credits, however, allow you to deduct even more from your taxable income than just what you spend on R&D, effectively putting additional money in your pocket.
The trick is knowing which projects count as R&D.
The first rule is that the R&D project must relate to your company’s primary trade or that of a company that you intend to start up.
The second rule, if you want to claim for R&D tax credits, is that it advances science or technology in some way. You’ll need to explain how your investment pushed the frontiers of knowledge forward. Experts shouldn’t be able to say whether a technology you want to develop will work based on existing information. Likewise, a researcher in the field shouldn’t be able to deliver the project themselves were they to work on it. The success of the project, therefore, needs to be uncertain.
Why The Taxman Should Be Your Friend
If you can successfully prove to HMRC that you are engaged in genuine R&D operations, you can claim an enormous amount of tax relief.
There are some rules.
You can only apply for the tax credits if you operate a small or medium-sized business. Your company must have less than 500 staff and it must turnover less than €100 million. It must also have less than €86 million on its balance sheet.
If you qualify, the benefits are extraordinary. The tax credit allows you to deduct an extra 130 percent of qualifying costs from your yearly profit added to the existing deduction you can make for the R&D expense itself.
If you are a loss-making enterprise, then you can claim back tax credits worth up to 14.5 percent of the surrenderable loss.
Many small businesses see the taxman as the enemy – an agency that takes more than it gives. In the case of the R&D tax credit system, the opposite is true. For innovative companies, the taxman is a friend.