Tax Breaks for R&D
Innovation has its rewards, but it comes at a price. We recognise that, while we can offer a broad range of industrial insulation solutions and products, including specialist prototyping, many businesses need financial support to get to the stage where they can initiate these developments. Research and development (R&D) can be a fantastic way of not only growing your own business, but also growing your industry. But it can be costly. Tax breaks for R&D is a vital part of it, and a huge incentive for many.
For SMEs and others to unlock innovation, they must first be able to identify which research and development (R&D) costs are eligible for tax breaks and funding.
Why Innovation Matters in R&D
Innovation is a key way for businesses to differentiate themselves, to gain a competitive advantage, to bring profit and to drive growth. By innovating, a company can take a strategic sidestep from fighting for a market share based on price alone.
In short, innovation offers an alternative roadmap for business growth. It can boost profits, while helping to ensure survival.
But more than that, it can grow a sector and boost the economic strength of the country. This is why the government offers tax breaks and funding for R&D.
In the UK, there has been some recognition of this among SMEs, with a reported doubling of the number claiming R&D tax incentives in 2016-17, compared to three years earlier.
However, research also suggests that many businesses eligible to claim are still failing to do so.
What R&D Tax Breaks Involve
This is how HMRC defines R&D taking place:
‘when a project seeks to achieve an advance in overall knowledge or capability in a field of science and technology.’
What the Government’s R&D tax relief scheme does is allow companies that carry out work that qualifies to claim and extra Corporation Tax (CT) deduction. The level of this R&D Tax break depends on the specific scheme a company chooses.
-There is an SME scheme, where a company can claim up to 230% relief on qualifying R&D costs. In fact, in some situations, loss-making businesses can surrender their losses and receive a payable tax credit in return.
-The other Government scheme is the Research and Development Expenditure Credit (RDEC) scheme. Under this scheme, there is a tax credit available at 11% of R&D expenditure, including a fully payable tax credit for loss-making companies.
Which scheme is applicable to your business?
HMRC looks at two things to determine this: staff headcount (less than 500) and turnover (under €100m) or balance sheet total (under €86m).
What R&D Projects Qualify For Tax Breaks?
Clearly, it is vital that a business can identify the what kinds projects will be eligible for tax breaks for R&D beyond HMRC’s broad definition.
Typically, manufacturing, engineering and software companies are involved in the sort of development that qualifies.
-Manufacturing and engineering projects might include: innovative product development; second generation or improved product development; designing innovative manufacturing equipment; prototyping and 3D modelling; using new materials to improve products, manufacturing processes or performance.
-Software projects could include: tools for application programmes; database software extensions; software development; innovative data capture or management; integrating software and hardware platforms.
R&D tax credit claims allow for certain activities related to a project, providing both direct and indirect support to the project concerned.
These activities include: defining technical objectives; feasibility studies; reviewing new and competing technologies; analysis and development; administration, finance and personnel supporting R&D; and training to support R&D.
R&D Grant Funding and Innovation
If R&D tax relief can help businesses recover some of the costs of innovation, what about funding it in the first place?
Whereas there are generally less Government grants available for small businesses than there once were, there is still significant grant funding available.
For example, there are government-backed start-up loans, or incubator and accelerator programmes, which are usually industry-specific.
Innovate UK provides useful assistance to businesses looking for funding opportunities and offers valuable innovation funding advice. It also runs funding competitions for testing ideas and developing innovative products and services.
UK Research and Innovation looks after the UK Government’s Industrial Strategy Challenge Fund, with the aim to increase funding in research and development by £4.7 billion over four years.
The Federation of Small Businesses (FSB) has its own funding platform, offering members access to a wide range of business funding options.
How Does Grant Funding Work With Tax Breaks for R&D
It’s not unusual for companies that innovate to look for financial support from different sources. Consequently, there will be companies who have received grant funding but may also wish to apply for R&D tax relief.
Grant funding can interact with R&D tax breaks, but in certain circumstances, it will affect a company’s ability to claim it.
This is where the difference between the two Government schemes, SME and RDEC, is important.
Where an SME receives grant funding, it may be forced to claim under the RDEC scheme, rather than the SME scheme. One reason is that the generosity of the SME R&D tax relief scheme means that it is classified as State Aid. Currently, EU law prohibits a company receiving more than one State Aid for a project.
Obviously, then, if a company has already received a grant, it cannot then claim the full SME R&D tax relief.
It is critical that if a business receives grant funding, it understands whether this is classified as Notified State Aid, as this will affect its later ability to qualify for R&D tax relief – in certain circumstances, a company could be worse off receiving a State Aid grant than if it had no grant at all but could still qualify for SME R&D tax relief.
Elmelin supports innovation, specialising in high temperature and thermal management solutions across a range of industries. We can help you develop, refine and improve your products or processes, and we have excellent manufacturing and prototyping capabilities to do this. We help companies with their vital R&D.