Small to medium businesses are missing out on valuable tax breaks for research and development simply because bosses are unaware that they qualify.
Despite a surge in Research & Development (R&D) tax credit claims submitted to HMRC, thousands of eligible companies are not participating, says Paul Duckworth, a partner in tax services to businesses at the Southampton office of Smith & Williamson, the accountancy, investment management and tax group.
He said new HM Revenue & Customs (HMRC) figures put the value of R&D tax credits at £1.75 billion for 2013/14, the latest figures available, with total claims going up by 19% and those submitted by Small and Medium Enterprises (SMEs) up by 23%.
Mr Duckworth said: “However, that leaves thousands of businesses missing out on an incredibly valuable source of funding – especially those in the early years of trading and often under pressure from a cashflow perspective.
“These business owners are either unaware of the potential benefits of R&D tax credits or possibly think they do not qualify. This might be costing them vital funding if they are spending money innovating and advancing technology.”
R&D tax credits, first introduced in 2000, allow companies incurring costs in developing new products, processes or services to receive a cash payment or tax deduction. The average annual claim for an SME claimant in the UK is £48,000.
The government incentive is designed to encourage innovation and increased spending on R&D activities by companies operating in the UK.
Mr Duckworth said that from April 1 this year the government increased the SME R&D uplift on qualifying spend to 230% and the rate of tax credit repayable on surrendered losses for large companies to 11%.
He said: “Loss-making SME businesses are now eligible for a repayment of up to 33% of qualifying expenditure, whereas those which are in profit can save tax at the rate of 46% of qualifying expenses.”
SMEs can benefit from an enhanced rate of R&D tax credits compared to larger businesses. To qualify, SMEs must employ fewer than 500 people and have either an annual turnover of no more than 100 million euros or a balance sheet total not exceeding 86 million euros.
“However, there has been a 10% decline in SMEs claiming both payable credits and a deduction from the corporation tax liability, potentially due to unawareness that the two can be combined,” said Smith & Williamson R&D specialist Mr Duckworth.
He added that many sub-contractors working for larger companies were unaware they could claim (just 660 claimed out of 3,950 large company scheme claims made in the 2013/14 tax year) – compared with 16,160 SME R&D claims in the same period.
Mr Duckworth said some industry sectors were lagging behind and yet to capitalise on the benefits of R&D tax credits – with construction and real estate and finance and insurance amounting for just 2% and 1% of the total.
“This is surprising considering the technological developments in construction methods, the advent of online estate agents and the increasing automation of many financial services as IT projects often qualify for the R&D tax credits.
“It is a great shame that these industries continue to show low levels of claims. Smith & Williamson has assisted many clients in these industries in making successful claims and would urge any companies spending on innovation in these areas to review their position.”
R&D claims by finance and insurance SMEs in the tax year 2013/14 averaged £88,000, significantly higher than the national average of £48,000 for all claims.