Research and development tax credits for small business: a quickstart guide

In the Spring Budget 2017 Chancellor Philip Hammond mentioned R&D tax credits for small businesses, specifically saying that not enough businesses are aware of them. So what are R&D tax credits, and how can small businesses use them to their advantage?

What is R&D?

R&D stands for research and development. While it might sound like the sort of thing only undertaken by large corporations, a lot of small businesses can be carrying out R&D without calling it that.

There are, however, strict criteria for what does and doesn’t count as R&D for the purpose of this specific tax relief scheme. We’ll go over the ins and outs of it so you can work out whether or not you’re eligible.

What are R&D tax credits?

R&D tax credits are a way for small businesses to claim back the cost of research and development activity. This is done via tax relief. This means that you pay for the R&D activity yourself, then when you pay your taxes you can subtract the allowed cost of R&D from your tax bill.

Who is eligible for R&D tax credits?

You’re eligible for R&D tax credits if you have fewer than 500 employees, and have either an annual turnover less than €100 million or a balance sheet under €86 million.

If your business is part of a bigger company - if you run a franchise, or work for a distribution company like Avon, for example - then you need to take the whole company into account, not just your part of the business.

Confusingly, this definition of a small business for the purpose of R&D tax relief isn’t exactly the same as the definition of a small business for other areas of Corporation Tax, other tax areas (such as PAYE), or the ones used in other government departments. When looking into other tax matters, make sure you’re using the definition of small business that’s relevant to that particular matter.

What can I claim for?

Under the Government’s rules, you can claim for ‘attempting to resolve scientific or technological uncertainties’. This might be:

  • Creating new products, processes or services
  • Changing an existing product, process or service

Your R&D project doesn’t have to be successful in order to qualify for the tax relief, and if you work for other companies or clients, then you can count that work.

If your project meets the above criteria, you can claim for the following expenses:

  • Staffing costs, including salaries, employer’s NIC and pension contributions
  • Hiring subcontractors and freelancers for the project
  • Materials and consumables including heat, light and power that are ‘used up or transformed by the R&D process’
  • Some types of software

If your company gets an R&D grant for the project, this may affect how much tax relief you can claim.

Calculating your R&D tax relief

For R&D you can claim 230% of tax relief. So if you spent £100 on R&D, you could claim £230 off your Corporation Tax bill.

How do I claim R&D tax credits?

You claim R&D tax credits when you fill in your Corporation Tax return, and you need to claim within two years after the end of the Corporation Tax accounting period which the project took place in.

When you get your Corporation Tax return, you will need to put an X in box 99 and then write the full amount of tax relief - that’s the figure that’s 230% of what you actually spent - in box 101. You also need to include this figure in the box for profit or loss (box three and box 122).

In order to make your tax return go as smoothly as possible, it’s advisable to include the reasons you think the project should be allowable as R&D, and a summary of the costs.

For more information, check out the government’s guide on how to complete and file your Company Tax Return.

Are you taking on any R&D projects this year? Let us know in the comments.

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