A lack of awareness has seen tax credits and relief available for projects under-claimed among entrepreneurs. Here, the tax experts at chartered accountants Tait Walker explain how to make the most of Britain’s tax system to fund your innovation.
The UK may only form 0.9% of the world’s population, but our fantastic reputation for science and innovation means that we enjoy 3.2% of the world’s R&D expenditure in universities and businesses.
We are ranked second globally for the quality of our scientific institutions and the number of Nobel prizes won. Four of our universities are ranked in the top 10 in the world.
It’s no surprise then, that the UK government wishes to encourage and stimulate this excellence, and our tax system includes some extremely generous reliefs for businesses undertaking creative and innovative lines of work.
However, these tax reliefs are often grossly under-claimed due to a lack of awareness by eligible businesses and a lack of expertise amongst advisers, particularly within the North East of England.
Research and development tax credits
The most well known relief is research and development tax credits (R&D). These are available to companies who can demonstrate that R&D has taken place, i.e. when a project seeks to achieve an “advance in science or technology” (improving overall knowledge or resolving an uncertainty). A project which makes an appreciable improvement to an existing product or process can also be R&D.
As would be expected, R&D projects are often undertaken by traditionally innovative sectors; manufacturing, pharmaceuticals and science/tech based businesses. However, there are also a number of other sectors which are undertaking R&D, albeit less obviously, including food and drink, marketing, retail, construction and professional services.
There are two schemes for relief – broadly for large and small companies. Some small firms don’t qualify as such because of other reasons (such as the receipt of grants or due to connected parties). The large company regime applies to any company not qualifying as an SME (fewer than 500 employees).
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The SME regime is more beneficial than the large company scheme (RDEC); it allows 130% additional tax relief for R&D expenditure (on top of the normal tax relief already given). Profit making companies can offset this directly against their taxable profits, which provides significant tax savings (43.7p for every £1 spent).Loss making companies can also benefit from the relief, as their losses can be surrendered in exchange for a payable credit worth 14.5% of the amount surrendered. This provides a cash benefit of 33.35p for every £1 spent on R&D.
The RDEC regime applying to large companies, whilst not as beneficial, is also worthwhile claiming. This involves a taxable credit being paid to the company, based on 12% of the R&D costs incurred (11% before January 2018). This provides 9.72p relief for every £1 spent in addition to the usual tax relief available on the costs themselves.
Patent Box tax relief
Whilst unrelated to R&D tax relief, Patent Box relief often will apply to the same businesses – it is a tax relief designed to incentivise innovation by lowering the corporation tax rate on profits deriving from products with a patent registered in either the UK, EU, or certain EEA countries.
The reduced rate of corporation tax is 10% and this applies to profits from patented inventions.
Other creative industry tax reliefs
A range of tax incentives were introduced in 2012 to encourage investment in the creative sector; many eligible companies already claimed R&D and these additional reliefs were designed to be similar, but alternative (and sometimes more beneficial), methods for claiming relief.
There is somewhat more clarity on the costs that qualify for relief than with R&D and the rules match up to how costs are incurred in the relevant industries.
The rules are also designed in such a way that make it easier to comply than with the R&D requirements in terms of advancing knowledge. They also help unlock cash benefits more quickly as they don’t rely on accounting periods in the same way.
Cultural tests apply to some of the reliefs, whereby the production must be certified as a British film, programme or video games.
More reliefs have been introduced over the years and there are now 8 categories of relief. Most of these reliefs provide either an enhanced deduction or a 25% repayable tax credit based on qualifying expenditure – which slightly differing rules for each. This roughly equates to around 20p relief for every £1 spent on qualifying costs, subject to conditions.
It’s also worth pointing out that companies may be able to use our tax system to fund innovation by providing generous tax breaks for outside investors. EIS/VCT and SEIS reliefs provide income tax breaks for investors.
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