How UK businesses can get a tax break for innovation

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HMRC’s latest figures on R&D tax relief show that record numbers of UK businesses are investing in innovation and development. However, many small businesses are missing out on vital funding for research and development (R&D) projects due to a lack of awareness of the SME (small and medium-sized enterprises) R&D tax relief scheme or fear that they will not be eligible to claim relief on their R&D expenditure. However, SMEs can get support and reassurance through the UK HMRC’s Advance Assurance scheme for R&D tax relief.

HMRC’s latest figures on R&D tax relief for 2017/18 show that there has been a 22% year-on-year increase in businesses claiming tax relief on their expenditure on research and innovation, with HMRC providing £4.3bn in tax relief for that period. There has been a sharp increase in the number of businesses claiming, from 39,960 businesses making R&D claims for 2016/17, rising to 48,635 in 2017/18. Since the tax relief was introduced by HMRC in 2000 in order to stimulate business spending on development and innovation across all industry sectors, £26.9bn in tax relief has been claimed by qualifying businesses.

In order to compete with the best in terms of innovation, HMRC has continued to support businesses to undertake R&D projects by providing generous levels of tax relief for those companies who embark on qualifying projects. However, HMRC’s figures show that it is failing to reach all industry sectors and geographical areas. For example, 46% of all R&D tax relief claims are concentrated in the London, South East and East Anglia region and only one in five small businesses in certain industry sectors, such as engineering, who have valid claims are applying  for this tax relief.

For small businesses, a key concern when making an application for SME R&D tax relief is not knowing whether a claim will be accepted by HMRC. HMRC runs a scheme called Advance Assurance, which is aimed at SMEs and provides those businesses with a guarantee that their R&D Tax relief claims will be accepted, providing the claims remain in line with what is discussed and agreed with HMRC. In order to be eligible, the business must be classed as an SME in line with HMRC’s definition, must be planning to perform R&D or have already done so and, if part of a group of companies, no other company within the group can have made a prior claim. By using the Advance Assurance scheme, small businesses can be assured that they will be able to claim tax relief on their qualifying R&D expenditure before committing to the spend.

SMEs aren’t permitted to apply if they are considered by HMRC to be a corporate serious defaulter and will need to provide their accounts to HMRC.  In order to apply for Advance Assurance, SMEs are required to provide their company accounts and Companies House registration documentation, along with any previous company tax returns in order to prove their eligibility. They are also required to provide a contact with direct knowledge of the R&D activities proposed or being undertaken so that HMRC can discuss the application in detail.

To qualify for SME R&D Relief, the business must have fewer than 50 employees and an annual turnover of less than €100M or a balance sheet of less than €86M. The tax relief for qualifying businesses and innovation development can be worth up to 230% of qualifying expenditure, which is expenditure directly related to the R&D. For loss-making companies, the tax relief can be converted into a tax credit.

Where SME R&D relief is agreed through the Advance Assurance scheme, these claims must be made in the first three accounting periods following HMRC’s acceptance of your development project and all claims must be in line with what has been previously agreed. There’s a wide range of covered expenditure, including employee costs, subcontractor costs, software and consumables, but certain costs such as rent, land and capital expenditure can’t be claimed for. HMRC provides guidelines to explain what can be accepted as R&D under the various R&D tax relief schemes it operates.

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