Chancellor gives a boost to SME’s RandD in Budget

Date: 24th March 2014

It was great to hear the Chancellor is increasing the rate of the Research and Development (R&D) Tax Credit for small and medium enterprises (SMEs) who are making losses from 11% up to 14.5% for R&D costs incurred from next week (1st April 2014). The increase was announced in the recent UK Budget Statement 2014.

This represents a large percentage increase, and means that up to 32.6% of what you spent on R&D can be claimed as a Tax Credit, which is a cash payment paid out in loss making situations. It now compares very favourably with the current 25% benefit available when offsetting R&D enhancements against a profit. (The higher percentages are the result of applying an R&D enhancement value to the amount spent before calculating the rate of the tax relief or credit).

This underlines the Government’s commitment to supporting businesses and helping them to invest in research and development and will help to ensure that the UK is at the forefront of technological innovation.

The chart below compares the R&D Tax Credit cash payment that is available at the old rate of 11% with the new rate of 14.5%. It is based on the company having spent £40,000 on eligible R&D costs in the year. The bottom axis shows the trading loss before the R&D claim is calculated and the left hand axis shows how much a company can claim as a cash payment for different levels of losses.

It is interesting to note that the greater the value of the loss the greater the Tax Credit payment up to a certain point.

For a company spending £40,000 on R&D the limit of the loss they can trade in for a Tax Credit is £90,000. In the above example this is the level of the loss after the R&D enhancement has been calculated. So the chart illustrates the maximum Tax Credit payable where the pre R&D trading loss is £40,000 and the R&D spend is also £40,000.

The R&D tax relief and tax credits scheme has been hugely successful as it does not favour any one industry but rewards any company that is forward thinking and prepared to invest in new products and internal developments.

Lack of knowledge of what qualifies as R&D means companies are missing out

The only downside is that too many companies and their professional advisers are still unaware that they can claim and do not understand what qualifies as R&D. It can be anything from using technology to improve internal processes such as data and information management, to supporting new product development for products as diverse as software applications, new ice cream recipes or new turned parts made by machine part manufacturers and of course inventions of all types where there is a commercial application.

The tax credit is paid where a company made a loss or where the additional R&D expenditure enhancement put the company into a loss for tax purposes (R&D expenditure is counted at an additional 125% of the actual cost). So please get in touch today so that we can help you to recover some of your R&D costs from the government.

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