It pays to be innovative in the UK.
Aside from the competitive advantage it can give you through increased productivity, superior products, attracting greater talent and so on, the government has a portfolio of tax incentives which reward innovation and investment.
The line of thinking is that dynamic, innovative companies are good for the economy.
So what’s on offer and how can you benefit if you are innovative?
R&D tax credits
Research and development (R&D) tax credits are a valuable incentive available to limited companies in the UK.
There used to be a long-standing view that to be doing R&D you must be in a lab or practising rocket science. This is widely recognised as a myth now. Many businesses understand that, in a tax sense, R&D can occur in just about any sector – from agriculture to manufacturing to financial services… to name just three.
The average annual R&D tax credit claim for SMEs reported in 2021 was £57,330. And for large companies (who use a more restrictive scheme called RDEC) it was £317,829.
As those figures reveal, R&D tax credits can make a real difference to a business’s fortunes, particularly SMEs. In fact, if you are not claiming and you could be, you are squandering a major opportunity. £57k could mean hiring a new technical expert in your business, buying a new piece of machinery or simply boosting your bottom line.
So how can you tell if you are eligible?
As we said earlier, as a starting point you need to be a limited company, and subject to corporation tax. You also need to have conducted qualifying R&D and spent money on these activities in either of your last two accounting periods.
There is a broad and nonspecific definition of qualifying R&D in the tax legislation. It says you need to be taking a risk in trying to resolve a scientific or technological uncertainty. This could be in producing new products, services or processes or modifying existing ones.
That reference to “risk” is important, because it signposts that your R&D does not have to be successful to qualify for tax credits. Failed attempts at innovation qualify too. But you do need to have spent money, because the way tax credits are calculated is based upon qualifying expenditure like staff costs and materials used up in the R&D process.
You can claim back up to 33p for every pound spent if you are loss-making, and 25p for every pound spent if you make a profit.
Super capital allowances
The super capital allowance scheme is a time limited offer available between 1 April 2021 and March 2023.
It allows businesses (again limited companies) to claim an enhanced deduction on new plant and machinery that they purchase. The enhanced rate is 130% instead of 100%.
This means that if you were to buy qualifying equipment for £10,000, you would be able to claim a tax deduction as if it cost £13,000. That’s £2,470, rather than £1,900 which is deducted from tax.
Most tangible assets for your business will qualify but they must be brand new, not used. So office furniture, commercial vehicles, computer equipment and machinery are all available for the super deduction. Notably, cars are not.
Help with innovation reliefs and incentives
With a host of support schemes available, it is essential you have good advisers by your side.
If you would like to explore ways in which you could benefit from incentives like this as you develop your business, get in touch with us. We can help you plan, identify your eligibility and make robust claims to HMRC.