What Is The R&D Tax Credit Potentially Worth To Companies?

Date: 6th September 2012

Research and Development Tax Credits – Latest Figures

The latest figures published by HMRC in August 2012 show that in the year 2010/11 around 8000 SMEs claimed £340m, making the average SME claim worth about £42,000.

From 1st April 2011 the rate at which qualifying Research and Development (R&D) expenditure is treated for Corporation Tax purposes increased from 175% to 200%, and on 1st April 2012 the rate increased again to 225%.

On that basis it is reasonable to assume that if the same claims were repeated in this financial year the average SME claim would exceed £55,000. The Labour government should be congratulated for introducing Research and Development Tax Credits in 2000 and the Coalition government should be congratulated for recognising the importance of the R&D Tax Credit scheme in encouraging large and small companies to invest in R&D. The Dyson report on innovation recognised the importance and said this:

Of the various tax instruments available to government, R&D tax credits have the advantage that they seek to help companies that are themselves prepared to invest in R&D. Government does not need to choose sectors or companies, with the result that R&D can be encouraged in the widest possible range of sectors, taking advantage of businesses’ own insights into likely breakthroughs.

Given that the number of SMEs in the UK is estimated to be around 4.5m, and the number claiming in the 2010/2011 year is around 8000, it is clear that much less than 1% of SMEs actually claimed R&D tax credits in that year. Is this an accurate reflection of the R&D work actually done by SME? Around 21,000 different SMEs have claimed R&D Tax Credits since the scheme started in 2000. This begs the question “Have a lot of SMEs stopped doing R&D or have many just stopped claiming R&D Tax Credits on the R&D they do”. I will address this question in a later blog.

At the current rates an SME with £100k of qualifying Research and Development expenditure would be able to reduce their Corporation Tax bill by £25k, or if they were loss making they could receive a credit in cash of more than £15k. These sums can make a significant impact on R&D budgets. Effective Research and Development can make a massive impact on corporate success and the bottom line.

One client explained to me that his company would need to generate sales of about £1m in order to have the same bottom line impact that his first R&D tax credit payment had made. Think about that!

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