Research and development (R&D) tax credits were brought in by the government in order to help the development of technology businesses and those engaged in innovation and research. In theory the concept is very simple. If you are developing a new product or service then you can take the costs of producing and place them against any profits you are making, reducing or even completely ending any corporation tax.
Things which R&D tax credits can be used for
Investment in new technologies. This can include IT software development, biotechnology or engineering.
Investment in new processes. This is particularly relevant in the manufacturing industry.
Investment in new procedures (particularly as regards manufacturing)
One thing which should be obvious from this small list is the emphasis on the word “new”. If you want to apply for these types of credits from HMRC you must be prepared to prove that you are investing in R&D. This will involve the production of detailed plans outlining the purpose of the research and a clear statement of the benefits that it will bring.
How does it work?
There are two types of R&D tax credits, one for SMEs and the other for large businesses. In all likelihood you will qualify for the SME scheme as this encompasses all companies with a turnover below €100m. However, the scheme doesn't apply to subcontractors working for large businesses, although these may be able to claim under the large business scheme. Under the small business scheme for every £100 you spend on R&D you can save a further £75 on your corporation tax, a relief of 175%.
You must be able to demonstrate the quality of your R&D procedures and that they are feasible. For example you might have to show that you have hired the right sort of people to carry out your programme. Do not therefore think that R&D is a simple way of gaining tax advantages.
If you think you are eligible for R&D tax credits then you should speak to your accountant as it is essential to make sure you record and document your costs in the right way. An enormous number of Government incentives for business, like R&D tax credits go unclaimed because businesses are either unaware or unable to afford the time applying for them. These tax credits could free up vital growth capital for your business and support new product development, so they are definitely worth considering.