Helping SMEs claim their R&D Tax Relief

The Financial Secretary, David Gauke, has outlined plans to make it easier for SMEs to understand and claim R&D tax relief.

R&D Tax Relief Claims on the Rise

The R&D tax relief scheme for SMEs works by lowering corporation tax for small businesses, allowing them to claim 230% of their qualifying R&D expenditure and thereby reducing the cost of R&D by 46%. SMEs who make a loss can also claim, and have the option of instead receiving a payable cash relief at a rate of 14.5%, reducing the cost of R&D by around 33%. SMES can carry forward the loss to set against income later if they prefer.

Introducing the outcomes of a Government consultation on improving the take-up of R&D tax relief, Mr Gauke stressed the importance of R&D.

“R&D tax relief plays a key role in the government’s objective for productive investment. R&D investment by smaller firms is vital for the performance of the UK economy, and Small and Medium Enterprises (SMEs) accounted for over 80% of all R&D claims in 2013-14.”

Mr Gauke was “delighted” to learn that the number of SMEs claiming tax relief has already improved, increasing by around 19% to over 15,000 in 2013-14, with the total amount of support provided through the SME scheme at £800m.

However, the Government’s consultation has shown that there is more to be done to make R&D tax relief “accessible for the smallest companies,” he says.

Two-Year Plan

The two-year plan to increase uptake outlines actions in the four areas focused upon in the consultation:

  • Awareness. Are key decision makers in small businesses aware of the relief?
    HMRC plan to “make more use of one-to-many communications such as email and Twitter to keep customers updated on R&D policy and technical developments. This will help us to talk directly to businesses that are already claiming, or thinking about claiming, R&D tax relief.” They also plan to use their own data and that of other agencies to identify businesses that undertake R&D but do not claim tax relief. The Advance Assurance Scheme, which launches this month, is a voluntary and non-statutory scheme for companies that have already undertaken R&D or intend to do so, and HMRC plan to undertake publicity to raise awareness of both this service and R&D tax relief generally “among small businesses and under-represented sectors.”
  • Design. Are the rules appropriate for small businesses?
    HMRC have listened to businesses who says the guidance of what constitutes R&D, and how to deal with situations in which sub-contractors take on R&D or they themselves become R&D sub-contractors, is “difficult to understand and apply.” They are committed to extending the guidance, providing more examples and giving greater clarity. “This will help both new and smaller firms better understand the relief and feel more confident in claiming it,” says HMRC.
  • Understanding. Do decision makers in small businesses understand the rules, how they apply to the company, and the claims process?
    HMRC will “issue bespoke guidance on R&D tax relief for smaller businesses” that will detail how it interacts with grant schemes etc., while the Advance Assurance programme “will ensure that first time claimants have a better understanding of how the R&D tax relief rules affect their business.” They also plan to produce templates that SMEs can use to record qualifying activity and expenditure.
  • Administration. Does the process operate smoothly (speed, and ease of use) for small businesses?

The Advance Assurance scheme will initially focus on first time claimants with a turnover under £2m and fewer than 50 employees, and it will be open to both companies that do and do not have a tax adviser, promising “comprehensive guidance” to make it accessible for companies without one. Successful applicants will receive assurance that HMRC will allow their first three years of R&D tax relief claims without further enquiry.

HMRC plan to explore and strengthen links between the Advance Assurance service and “the financing of innovative small companies,” and the demand and potential for extending the service beyond SMEs.

If you think your small business could be missing out on R&D tax relief, discuss the issue with your accountant or take a look at the current Government guidelines, particularly the details of the Small and Medium Enterprise Scheme and the guidance on How much R&D Relief SMEs can claim.

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