Could research and development (R&D) tax credits be a target for Rachel Reeves in her first Budget? The annual cost of the credits, paid to businesses investing in innovation, has increased to around £7.5 billion a year. And amid warnings that not all claims are bona fide, that pot of cash could make a tempting target.
More than 55,000 small businesses received R&D tax credits last year, the latest figures from HM Revenue & Customs show, underlining the value of this scheme to large numbers of companies. However, the scheme has already undergone substantial changes, with reforms introduced in April aimed at simplifying the system and cracking down on ineligible claims.
Recent R&D reforms
The new arrangements have merged the two separate schemes that discriminated between claims made by small and larger businesses. However, the principle remains the same: if your business invests in innovation, it should be able to offset some of the cost of that investment against its corporation tax. And if you’re not paying corporation tax because your business is not currently profitable, you should still be eligible for support.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The rules get quite technical, but the relief is a valuable one, enabling you to claim back up to 27% of your innovation costs (depending on your circumstances) under the new merged scheme. Claims can be made in relation to innovation costs incurred in your past two accounting years.
Importantly, innovation has a broad meaning under the scheme. It might be that your business is investing in trying to make some sort of advance in science or technology. Or you may be seeking to overcome some sort of scientific or technological uncertainty. That brings a broad range of work into play. It’s not only major technology breakthroughs that count, but also investments in process or development – a company that finds a new way to run an operation or execute its production, say, may be eligible to claim. While HMRC’s figures show that companies in the information and communications sector account for more R&D tax credits than any other, it also receives plenty of claims from manufacturers, professional services companies and the construction industry.
The bottom line is that if your firm is pursuing innovation of any kind, it is worth looking into whether you are eligible for support. And while it seems unlikely that the chancellor would axe the scheme altogether, she may seek to make further changes to the rules. It therefore makes sense to assess your position now, if only to understand how the Budget affects you.
That said, tread carefully with claims. In recent years, the government has become increasingly concerned about the quality of claims – and fraud – and HMRC has been scrutinising filings more closely. The tax authority even has powers to claw back credits it decides should not have been paid, with a growing number of small businesses handed bills for thousands of pounds. Some of those demands relate to claims made several years ago.
It’s therefore imperative not to leave yourself vulnerable to a difficult inquiry from HMRC. It may be a good idea to take professional advice from an accountant or a tax credits specialist before proceeding with a claim. But work with an adviser you trust. A small cottage industry has grown up around the tax-credits sector, with firms making bold claims about how much support they can secure for businesses. They will typically take a sizeable chunk of this cash – and if HMRC does subsequently investigate your case, it may be difficult to pursue the adviser.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
What MoneyWeek writers read and watched in 2024Here's a roundup of MoneyWeek's favourite books, films and TV shows in 2024
-
Why Saba is trying to take advantage of UK investment trustsMax King looks at why ever-widening discounts may have created an opportunity for Saba Investments in the UK world of investment trusts
-
How AI can help your small businessMany small companies think AI tools are beyond them, but they are easy to use
-
How Rachel Reeves's inheritance tax changes could impact your family businessThe rules on business property relief are a new headache for small firms
-
Business rates relief to be slashed – how to cut costsLabour has promised to reform business rates, the corporate equivalent of council tax
-
How small businesses can take advantage of new sources of financeSmall business Banks have reduced lending to small companies, but there are alternatives as the finance market continues to evolve
-
Is Labour on the brink of a crisis?Labour's Autumn Budget is approaching – a fiscal and economic storm on the scale of 1976 looks likely, says Max King
-
What can small businesses expect from Labour's employment law reforms?Small businesses could be impacted by Labour’s reforms to employment law which will be unveiled next month – here's how to prepare.
-
How SMEs can secure public sector workWhen it comes to bidding for public sector work, there are a few things SMEs can get a grip on
-
How to choose a web hostWith a web host, your company will have an internet presence
