smallbusiness.co.uk: Helping your business think big

The UK's SMEs may be rich in innovative ideas, but it seems they're not that good at filling in forms.

That seems the most likely explanation for the fact that out of the four million small and medium-sized businesses out there, only around 4,500 are successfully claiming research and development (R&D) tax credits.

Ann Jones, managing director of business finance consultants LowendalMasai UK, says: ‘SMEs often have an idea that in order to qualify for R&D they need to have lots of men in white coats doing a lot of blue sky thinking. But it can sometimes just involve carrying-out scientific or technological activities in creative manner.’

Jones does concede there's a catch. It can sometimes be difficult to convince the tax office of the merits of your application. ‘There is a feeling that HMRC is so used to administering & collecting tax, they often struggle with the concept of reduction in corporate tax burden through the R&D tax credit scheme’ she says.

In order to receive tax credits the company needs to be making corporation tax returns and spending over £10,000 on R&D-related costs – a full list of which can be found on the HMRC website.

As for the definition of what constitutes R&D, Rachel Marsdin, associate director of chartered accountant Moore and Smalley, explains: ‘We normally advise that it has to either involve the resolving of a technological uncertainty or using existing technology in an unusual or innovative way.’ Routine cosmetic improvements do not count.

It is important that you have a full record of exactly where your R&D costs have been allocated. Also, if you are receiving grants for some of your projects you cannot take the money spent in these areas into account when claiming.

For SMEs R&D tax credits come in two forms

Firstly, if the company is profitable it can apply for enhanced relief on the tax it pays. For every £100,000 of expenditure spent on R&D activities, the company is able to reduce its tax by £21,000.

This amounts to 21 per cent of qualifying R&D costs. For periods prior to 1 August 2008 the tax relief is calculated at 15 per cent.
 
For companies making a loss, R&D claims can mean getting an injection of cash back. If the company has spent £100,000 on R&D, it will receive £24,000 as a repayment. However, it must be paying more than this in NI and PAYE to qualify.

Despite the complications, there must be a lot more than 4,500 companies out there which are eligible, and there is no reason not to invest a little time in investigating further.

‘It’s definitely something more companies should look into,’ says Jones. ‘In these cash-strapped times it can bring a significant amount of money back into the company.’

In other words, don't look a gifthorse in the mouth.