The chancellor announced sweeping changes to the research and development (R&D) tax credits system in his 2011 budget, offering greater encouragement for entrepreneurs to invest in original research and product design. But what exactly do the changes entail, and what do they mean for small businesses?
Essentially, the changes announced the budget have significantly increased the tax breaks available to companies which invest in research and development.
Under the new rules, a company which runs a dedicated R&D scheme can claim up to 200% relief on corporation tax for any money they spend on the project; essentially, this means the company will pay no tax on the cost of its programme, and receive an additional 100% corporation tax discount. The amount of relief will rise to 225% in 2012.
Furthermore, for those companies which make a loss on their R&D programme, the government is now offering payable credit for up to 24% of the project's total cost - a major boost for the tech start-ups which are being strongly encouraged by the current administration.
But before every small business starts rushing out and investing in a ground-breaking research project, it's important to know what an R&D project actually is. There's no point splurging thousands of pounds on R&D if it doesn't meet the government's criteria for tax relief.
At its most simple, R&D refers to research which directly contributes to the creation of new and innovative products, processes and services, or simply the enhancement of knowledge and understanding. The project must have wider relevance, and benefit, beyond the profit margins of the company carrying out the work. If you're thinking of carrying out an R&D project purely for your own ends, you won't get tax credits for it.
On the other hand, if you want R&D tax credits, you must prove the research is linked to what your company does. If you make industrial cleaning products for a living, and then suddenly decide to build a new type of spaceship, the government won't look favourably on your R&D application.
Finally, it's important to know what sort of industries and sectors qualify for R&D relief. The credits are primarily designed for companies in the science and technology sectors, such as manufacturing, engineering and hi-tech; if your company operates in the humanities or social sciences sectors, you probably won't get much joy in applying for relief.
It's also worth noting that your research must be original - i.e. it should not duplicate research which has already been done - and your findings must be borne of a systematic process - if you've just got lucky with a random piece of investigation, or happened upon an amazing discovery while going about your usual business, you'll be wasting your time if you go in search of credits.
If you feel that the work you are undertaking, or plan to undertake, qualifies for R&D tax credits, it’s imperative that you apply for consideration. As the old saying goes, there is no harm in asking. If you fail to apply for R&D tax breaks, you could miss out on valuable savings, putting your entire project at risk and damaging the viability of your business.
All claims relating to R&D tax credits must be included in your company tax return, or amended return. As a small business, you should put a tick in box 99 of the form to pinpoint the size of your company, then insert a figure for the enhanced expenditure in box 101 – this is the amount you spent on the R&D project, multiplied by 2.
The normal time limit for making your claim is two years after the end of the relevant Corporation Tax accounting period. This figure should also be included in your calculations of the profit (Box 3) or the loss (Box 122).
And the boxes don’t stop there – you’ve also got to put the amount payable in boxes 87, 89 and 143 – and put an X in the ‘repayment due for this return period’ box, found on page 1.