Can your small business claim R&D tax credits?

Government-backed R&D Tax credits enable businesses to reclaim a percentage of their research and development costs, even if the project itself failed. But many small businesses could be leaving money on the table by not claiming R&D tax credits - so who is eligible and how does this scheme work for SMEs?

How do R&D tax credits work?

The money from tax credits is paid as a corporation tax refund after the end of the financial year, and it can be used for anything from hiring developers to purchasing equipment. Research and development is used to obtain new information for use within the business’ processes, services and product offerings. 

Any business that spends money on developing new products, innovating, or building on existing processes to add to the company’s bottom line can benefit from R&D tax relief and the scope for how these tax credits can be used is vast. The SME tax relief can be used to deduct an extra 130% of qualifying costs from yearly profits, in addition to the standard 100%, as well as claim a tax credit if the company is loss-making. 

Who is eligible? 

SMEs can claim R&D tax relief if they have: 

• Fewer than 500 employees
• A turnover of less than £100m or a balance sheet total of under £86m

If your business operates with external investors, this can affect your eligibility and SME status, so it’s worth speaking to an advisor if this is the case for further advice. With R&D taking place in virtually every sector, many businesses could be benefitting from this form of tax relief, from agricultural, packaging, and digital firms to furniture production, food manufacturing and government contractors. 

What can businesses claim for? 

The government’s definition of what constitutes research and development is deliberately broad in order to enable businesses in a host of industries to benefit from R&D tax credits. Ultimately, if your company is taking a risk in aiming to resolve an issue or build on an existing process, then you could qualify. SMEs can claim specific costs for projects from the date the project is started until the project is stopped and you reach the goal. You can claim for a proportion of expenditure related to:

• Employee costs, such as salaries, Class 1 National Insurance contributions and pension fund contributions. You can also claim towards administrative costs related to the project if support staff were used. 
• Subcontractor costs.
• Software used for R&D projects and activities.
• Materials and utilities used for R&D.
• Clinical trial volunteers, for R&D projects related to the pharmaceutical industry.

However, you can’t claim for the production of products and services, capital expenditure, the cost of land, patents or trademarks, or rent and property rates. 

The UK needs to spend more on R&D to compete with the rest of the world - without investing in this area, businesses are at risk of falling behind at such a crucial time economically. Making the most of R&D tax credit relief entitlements are one way that SMEs can take advantage of the operational rewards while also benefitting financially.