Why R&D Tax Credits are Crucial for SMEs

1. Why R&D Tax Credits are Crucial for SMEs By Liana Jacob Innovation is at the heart of the SME R&D tax credit scheme; without it, businesses – large and small - would fail to survive especially within an uncertain environment such as COVID-19. Small or medium-sized enterprises (SMEs) make up roughly 99.9% of all businesses in the UK, therefore they are fundamental to the UK economy. While the parameters of what defines an ‘SME’ vary depending on the country, in the UK they are made up of fewer than 500 employees, with a turnover of less than €100 million (£89,376,704), or a balance sheet total of less than €86 million (£76,865,508). The 99.9% of businesses are the main priority for the government as they make up the majority of earnings for the UK. It is crucial for them to keep up with the latest business trends and that they maintain innovation, through this, they can claim tax relief through the HMRC. Creativity and innovation have never been as essential for SMEs as they are now. Not since the recession of 2008. During these unprecedented times, businesses, particularly small and medium- sized ones, need to adapt to survive. Keeping SME business owners on their toes through incentivisation has been the key ingredient for business success; the R&D tax credit scheme is a motivating step. In 2018, government statistics showed a 22% year-on-year increase in new claims from SMEs. The influx of funding helped SME R&D Tax Credits produce ground-breaking products, processes, and services in the UK. Now, with COVID-19, these improved services are more essential than ever before. By claiming R&D tax credits for SMEs, funding is used to hire new staff, open new offices (business expansion) and as a result, this helps their business make a profit and grow rapidly. With smaller businesses, there are fewer employees, meaning less money is coming in unless owners come up

2. with newer and fresher ideas. Larger companies become established quicker and are able to make a profit sooner, therefore, the R&D tax credit scheme is vital for SMEs. The SME research and development (R&D) tax credit scheme offers a benefit of up to 33%, which is the equivalent of up to 33p for every £1 spent. Once a claim has been arranged, the benefit comes in the form of a cash payment and/or a corporation tax deduction within just four to six weeks. The funding can be greatly beneficial to businesses, especially for new businesses that haven’t been fully established yet. Typical eligible R&D costs include staff and subcontractor costs, materials and consumables which include heat, light and power along with types of software. The SME R&D tax credit claim allows a further 130% of this eligible R&D government funding to be deducted when calculating the profits of an SME company’s trade and its exact return on investment will depend on the company’s qualifying R&D activities and costs. The SME R&D tax credit scheme also allows loss-making companies to claim a payable credit, for example, a loss-making company with roughly an R&D spend of £500,000 could claim up to £166,750 as a tax credit. Between the months of March and July 2020, around one in four companies across the UK have been forced to shut down due to coronavirus. The government announced the closures of all nonessential businesses during lockdown. But regardless of this bleak result, companies across various sectors have seen this situation as an opportunity to innovate. The SME R&D Tax Credits scheme encourages these businesses to think outside of the box. According to the latest figures revealed by the House of Commons Library, the total funding for innovation in the UK has come to £37.1 billion, which was equivalent to 1.7% of GDP. The UK government wants to increase this to 2.4% of GDP by 2027 through both incentivising and funding innovation. It is proven businesses that have the ability to adapt, are more likely to remain resilient even during the most uncertain of times. From the 1st April 2015, a company can get a relief increased to 230% on their qualifying R&D costs, while loss-making companies can surrender their losses in return for a payable tax credit. The long-term economic growth and advancement of a company depends on its conception of new knowledge and its implementation into new or improved products, processes, or services. Source:- https://medium.com/@areandeuk/why-r-d-tax-credits-are-crucial-for-smes-1603ef8f1e45