Tax Relief

Analysis and Improvement Tax Breaks: A Information for Small Companies

Small businesses can reduce their tax burden by taking tax breaks for research and development (R&D).

Read on to find out if your company is eligible for R&D tax breaks, what to apply for, and how to apply.

What is a tax break for research and development?

Companies can claim tax breaks if they participate in a research and development project. According to HMRC, an R&D project aims to improve knowledge or skills in technology or science.

That said, if your company is doing an R&D project related to your trade or industry, you can significantly reduce your corporate tax burden.

Some companies can claim up to 230 percent of the R&D tax break while there are still incentives for companies that make losses or do not pay corporate income tax.

What is an R&D project?

Your research project must show that it expands knowledge by solving a technological or scientific problem.

Here are three important things to keep in mind when considering an R&D project:

  • It can’t cover the cost of a new product you’re developing

  • You have to solve a problem that a professional in your field cannot easily solve

  • it must benefit your entire industry, not just your company

An R&D project can include:

  • Improving the efficiency, capacity and performance of processes

  • Development of systems and processes

  • Packaging solutions

  • Integration of further technical development into working practice

For some examples of R&D tax relief, R&D Tax Solutions has a library of case studies on R&D projects on its website.

Does my small business qualify for research and development tax breaks?

Small companies can take advantage of R&D facilities if they have fewer than 500 employees and a turnover of less than 100 million euros or a balance sheet total of less than 86 million euros.

If you have received funding, e.g. For example, angel investing or venture capital, you will need to provide the details as this may affect your ability to obtain tax breaks for research and development.

You will also need to provide details about affiliates and partner companies. For example, if you have an interest in another company or if a company has an interest in your company.

What is an R&D tax credit?

Loss-making companies can tax R&D in the form of a tax credit.

Under the government’s SME program, companies making losses on an R&D project can claim a 14.5 percent tax credit.

HMRC says it will process 95 percent of due tax credit claims within 28 days of receiving the claim.

The manual on SME regulation explains how you can claim a tax credit in the event of a claim.

What costs can you claim as R&D tax relief?

You can claim project costs for staff wages, also on a pro rata basis for any subcontractors or temporary workers.

The R&D tax break also covers the cost of the materials and supplies you need for the project.

However, you cannot claim costs related to the manufacture and distribution of goods and services, rentals, land or brands.

How to apply for tax breaks for research and development

Research and development tax breaks are usually set off against your corporate income tax, so you will likely need to have a limited liability company incorporated if you want to take advantage of them.

You can find out how much to charge by following these steps:

  1. Calculate the total cost of the R&D project

  2. If you’ve paid subcontractors or outside personnel to work on the project, reduce their payments to 65 percent of the original cost

  3. Add up all of your costs and multiply by 130 percent

  4. Add this number to your original cost to get the final number to add to your tax return

You can claim the amount you spent on the R&D project on the corporate tax return form (CT600).

An R&D relief claim can be asserted up to two years after the end of the accounting period to which it relates.

For example, if the R&D project took place in June 2021 in a billing period from April 2020 to April 2021, you have until 2023 to submit the application.

Support your claim

HMRC has an online portal where you can upload details to support your tax break application. You need a Government Gateway login to access the portal.

You can upload receipts after submitting your full corporate income tax return.

It is recommended that you write a short summary explaining your research project, how you investigated a scientific or technological advance, what uncertainty you overcame, and why it was difficult.

In addition to the summary, you need to provide:

  • Your unique tax number (UTR)

  • Details of the billing period in which your R&D project took place

  • how much you charge and a breakdown of the cost

  • any losses you made during the billing cycle

If you claim up to three projects, you must provide all the details.

However, if you want to engage more than three projects in the same period, you must fully identify at least three of them and ensure that they cover at least 50 percent of your total R&D costs.

What other tax breaks are there for small businesses?

In addition to the R&D tax break, there are several other types of small business tax breaks, including:

  • Annual investment allowance

  • Unemployment benefit

  • Seed company investment program

  • Tax breaks in the creative industries

Read our guide to small business tax breaks to find out if you’re eligible and how to take advantage of these incentives.

Would you like to know more about tax breaks for research and development? Let us know in the comments below


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