Finance · 5 April 2016

R&D tax credits are a boon to small firms – as long as staff can make the most of them

r&d tax credits
Business owners can reduce profits liable to corporation tax by 230 per cent of their qualifying R&D expenditure

Business owners who receive tax credits for research and development (R&D) improve their chances of succeeding in “radical process innovation”, according to new academic research carried out at Brighton Business School – but only if employees have the skills to make the most of funding.

The research, entitled: You can lead a firm to R&D but can you make it innovate? was based on survey responses from 5,723 UK SME owners – the majority of whom were at the helm of micro businesses.

It revealed that 14 per cent of these small UK firms had received R&D funding in the last three years – with agriculture, forestry and fishing companies some of the most likely to receive such credits.

The study identified a strong relationship between enterprises receiving R&D credits and creating innovative new processes, though only when the companies in question had skilled employees available to bring such innovations about.

The study’s author, professor of entrepreneurship Marc Cowling, found no correlation between R&D tax credit receipts and product innovation.

“A reasonable policy implication is that public policy-makers should encourage firms to build up internal capability and make a strategic commitment to innovation,” Cowling wrote.

“Public policy needs to take a wider, and more integrated view, which incorporates access to finance, international market development, and building internal firm-level capabilities,” he added.

Tax credits for R&D were introduced by the government in 2000, and allow business owners to reduce profits liable for corporation tax by 230 per cent of their qualifying R&D expenditure.

The most recent statistics available show the uptake of the incentive increasing year-on-year – with more than 15,000 SMEs claiming the relief in 2013.

Advanced Assurance for R&D tax credits was introduced in November 2015 – and means that small firm owners can now get approval that money spent on innovation will be tax-deductible before embarking on the research. At the same time as announcing the move, HMRC pledged to make it easier for small business owners making their first claims to understand the relevant legislation.

“R&D is crucial for the long-term growth of the UK economy. That’s why we’ve published a document setting out our plans to increase awareness and make it easier for people to apply,” said financial secretary to the Treasury David Gauke.

If you’re thinking of applying for R&D tax credits, read our expert guide first.

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Hannah Wilkinson is a reporter for Business Advice. She studied economics and management at Oxford University and prior to joining Business Advice wrote for Kensington and Chelsea Today about business and economics – as well as running a tutoring company.