How can small businesses get R&D tax relief?

Small businesses can reduce their tax bill by claiming research and development (R&D) tax relief.

Read on to find out if your company is eligible for R&D tax relief, what you can claim for, and how to apply.

What is R&D tax relief?

Companies can claim tax relief when they take part in a research and development project. According to HMRC, a R&D project aims to improve knowledge or capability in technology or science.

This means if your company carries out a R&D project related to your trade or business sector, you could significantly reduce your corporation tax bill.

Some companies can claim up to 230 per cent R&D tax relief, while there are still incentives available for businesses making a loss or those that don’t pay corporation tax.

What is a R&D project?

Your research project will need to show that it’s increasing knowledge by solving a technological or scientific problem.

Here are three key things to remember when considering a R&D project:

• it can’t cover the cost of a new product you’re developing
• you’ll need to address a problem a professional in your field couldn’t easily solve
• it must benefit your whole industry and not just your company

A R&D project could cover any of the following:

• improving efficiency, capacity, and performance of processes
• development of systems and processes
• packaging solutions
• integration of a technical advancement into working practices

For some R&D tax relief examples, R&D Tax Solutions has a library of R&D project case studies on its website.

Is my small business eligible for R&D tax relief?

There are currently two types of R&D tax relief available for small businesses. Small businesses are able to claim this relief if they have less than 500 staff, a turnover of under €100 million, or a balance sheet total under €86 million.

If you’ve received funding, such as angel investment or venture capital, you’ll need to provide the details as it may affect whether you can claim tax relief on research and development.

You’ll also need to provide details of any connected companies and partner companies. For example, if you own a stake in another company or a business owns a stake in your company.

However, this is set to change from April 2024.

Simplified R&D relief

As part of the Autumn Statement, the government announced that the two types of R&D tax relief will be merged into a single scheme from April 2024.

This means that the current SME R&D tax relief for small businesses and the R&D expenditure credit (RDEC) scheme for larger business will become one scheme.

By creating just one scheme, the government hopes to simplify and improve the system, encouraging more businesses to get involved and more innovation to take place.

Find out more about the changes to R&D tax relief announced in the Autumn Statement here.

What is a R&D tax credit?

Loss-making companies can receive tax relief on R&D in the form of a tax credit.

Under the government’s SME scheme, companies that make a loss on an R&D project can claim a tax credit of 14.5 per cent.

HMRC says it deals with 95 per cent of payable tax credit claims within 28 days of receiving the claim.

The SME scheme manual explains how you can claim a tax credit if you make a loss.

What costs can you claim as R&D tax relief?

You can claim project costs for staff wages, including a proportion of those for any subcontractors or agency staff.

R&D tax relief also covers costs for the materials and utilities you need for the project.

However, you can’t claim for the cost of production and distribution of goods and services, rent, land, or trademarks.

How to claim research and development tax relief

Research and development tax relief is usually claimed on your corporation tax, so the chances are you’ll need to have formed a limited company if you want to benefit.

You can work out how much to claim by following these steps:

1. Work out the total cost of the R&D project
2. If you paid any subcontractors or external staff to work on the project, reduce their payments to 65 per cent of the original cost
3. Add all your costs together and multiply them by 130 per cent
4. Add this figure to your original costs to get the final figure to add into your tax return

You can claim the amount you’ve spent on the R&D project on the Company Tax Return form (CT600).

A R&D relief claim can be made for up to two years after the end of the accounting period it relates to.

Supporting your claim

HMRC has an online portal where you can upload details to support your tax relief claim. To access the portal, you’ll need a Government Gateway login.

You can upload supporting documents after you’ve submitted your full corporation tax return.

It’s recommended that you write a short summary explaining your research project, how you investigated a scientific or technological advance, any uncertainty you overcame, and why it was difficult.

As well as the summary, you’ll need to provide:

• your unique tax reference (UTR) number
• details of the accounting period in which your R&D project took place
• how much you’re claiming and a breakdown of costs
• any losses you made during the accounting period

If you’re claiming for up to three projects, you’ll need to provide full details of all of them.

However, if you want to claim for more than three projects in the same period, you’ll need to provide full details for at least three of them and make sure they cover 50 per cent or more of your total R&D costs.

What other tax reliefs are available for small businesses?

Alongside R&D tax relief, there are several other types of tax relief for small businesses, including:

• Annual Investment Allowance
• Employment Allowance
• Seed Enterprise Investment Scheme
• Creative industries tax relief

Read our guide to small business tax relief to find out whether you’re eligible and how you can claim these incentives.

Is there anything else you want to know about R&D tax relief? Let us know in the comments below

More small business guides

• What is ROI?
• What is payment on account?
• What limited company expenses can I claim?
• What is venture capital?
• How much public liability insurance do I need?

Photograph 1: NDABCREATIVITY/stock.adobe.com