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Over a period of five years (from 2011-2015), the total number of UK tech businesses grew by 28%, and the growth rate for digital sector jobs was more than double that of non-digital jobs.
This is all great news for the UK economy, but many of these new technology businesses may be missing out on a fundamental UK government incentive for innovative companies: R&D tax credits.
Is your business eligible for the SME or large company scheme?
For a company to be regarded as an SME, it must have a group headcount of below 500 staff and meet at least one of the following: a turnover of below €100 million or gross assets of less than €86 million. A large company is any company that exceeds the SME thresholds.
From 1 April 2015, the relief SMEs can receive has increased to 230% on their qualifying R&D costs. Loss-making companies can, in certain circumstances, surrender their losses in return for a payable tax credit.
What activities can be included in an R&D tax credits claim?
The following activities would be considered eligible for R&D tax credits:
What could R&D tax credits be worth to a small or medium business?
For profit-making SMEs, the R&D tax relief would reduce the amount of corporation tax they pay on profits for the period, by the amount of the enhanced deduction. The current R&D tax credits rate results in a 26% benefit on R&D expenditure for profit-making SMEs.
For loss-making SMEs, the company can decide between the following options:
The company can surrender the lower of the enhanced R&D relief or the taxable losses for the period. The losses are surrendered for a cash credit (tax credit payable) and the current rate is 14.5%.
R&D tax credit claims made by industry sector
HMRC’s are for the 2014-15 financial year. Once again, there was an overall increase in the number of tax relief claims submitted, as well as in the overall total amount of relief claimed.
The total number of claims in the 2014-15 period was 22,445, with 18,630 claims under the Small and Medium Enterprise (SME) scheme (an increase of 16%). The industry sectors with the largest number of claims were ‘Manufacturing’, ‘Professional, Scientific, and Technical’, and ‘Information and Communication’. Software development activities are included under the ‘Information and Communication’ sector, which had 5,165 R&D tax relief claims in the 2014-15 period.
How many other software development companies are eligible to claim R&D tax credits?
The Department for Business, Innovation & Skills has provided showing that there were 1.3 million employing businesses, with 73,035 employing businesses in the ‘Information and Communication’ sector. If 20% of businesses in this sector – over 14,5000 – are eligible for R&D tax credits, there are over 9,000 businesses in this sector.
Although there has been a continuing increase in the number and value of R&D tax credit claims, there are still thousands of companies – especially SMEs – that aren’t claiming what they’re entitled to.