R&D tax credits are an effective way for small businesses to raise money while offering incentives to investors.
We highly recommend R&D tax credits to both businesses and investors. R&D stands for Research and Development.
The Definition of R&D
In the Frascati Manual (2015), published by the Organisation for Economic Cooperation and Development (OECD), R&D is:
- creative and systematic work
- undertaken in order to increase the stock of knowledge
- (including knowledge of humankind, culture, and society)
- and to devise new applications of available knowledge
This is the internationally agreed standard definition. Therefore, according to the OECD for an activity to be an R&D activity, it must satisfy five core criteria. Namely, the activity must be novel, creative, uncertain, systematic and be transferable and/or reproducible.
Our government is keen to increase total investment in UK R&D and has committed to meet a target of 2.4% of gross domestic product (GDP) invested in UK R&D by 2027.
How R&D is Related to Brexit
This is partly driven by concerns to boost R&D spend after Brexit. The incentives offered by the government to encourage R&D have increased over recent years to help encourage more innovation in the UK. This was reflected in the most recently published figures for 2016 with R&D spending in the UK growing to reach a new record high of £33.1 billion representing 1.67% of GDP.
The R&D tax credits are a valuable tax relief that helps push UK companies to increase spending on R&D activities. The tax credits for doing so can be significant. For tax purposes, the requirements that must be met for R&D to qualify for relief include creating;
- New processes
- Products or services
- Making appreciable improvements to existing ones
- Using science and technology to duplicate existing processes, products and services in a new way
Do I Need To Have Made a Profit?
In fact, R&D activity can qualify for tax relief even if the project in question failed and both profitable and loss-making companies can benefit from making a claim. Moreover, even the mere investigation of a potential idea could qualify.
R&D tax relief is available on qualifying expenditure and reduces the amount of Corporation Tax payable by profitable companies, allows for a cash credit for loss-making companies, or a combination of the two. The amount of R&D tax relief available depends on the total qualifying spend on R&D activities.
If you’d like to discuss how your company can benefit from R&D, get in touch.