Supporting Innovation with tax credits: R&D for SMEs

Whether your business is a start-up or a growing SME, supporting innovation with tax credits can be a vital resource that support the ongoing growth of a business. The scheme was created more than two decades ago and has provided essential support to businesses at many different stages of development. Crucially, for SMEs and early-stage businesses, an organisation doesn’t have to be profitable to be eligible for R&D tax credits, as this is available to loss-making companies too.

R&D tax credits – the SME scheme

There are two schemes available under R&D tax credits, a scheme that is available for larger limited companies and one that is designed for SMEs. There are a number of factors that will make a business eligible under the SME scheme, including:

• No more than 500 staff
• A turnover of less than €100m or a balance sheet total of less than €86m
• Eligible R&D activities

Depending on the business and its activities the rate of relief that can be claimed can be as high as 230%, which means that for every pound spent on R&D activities there is the potential to reduce tax liability by 44p. Where the business is not yet making a profit, this can be carried forward and set off against future losses – or surrendered for a cash tax benefit.

Incentivising businesses to take risks

Innovation requires a certain appetite for risk and this can be eroded by challenging financial circumstances, such as those that we have seen during the pandemic and which continue to dominate now. R&D tax credits provide a way to incentivise businesses to take more risks by benefitting from greater investment in R&D activities. There are a number of different categories of expenditure that can be claimed under the R&D tax credits scheme, including software, employee costs, utilities and materials. It’s also possible for small businesses to claim for the costs of subcontractors and external agencies in some circumstances. There are also a few categories of expenses that can’t be claimed for and these include patents and trademarks, land purchases and the production and distribution of goods.

Funding research and development

HMRC’s definition of research and development is intentionally broad and includes any project that is focused on overcoming something technically difficult, advancing science or technology. This is essentially all about overcoming existing limitations, especially when it comes to technology. There could be many different reasons for investment in R&D, from the desire to make products cheaper to speeding up a process. However, that doesn’t limit the availability of R&D tax credits to new technology or science sectors – anything that is technically difficult and looking to achieve a different result will be likely to be eligible.

R&D tax credits are an effective way for the UK government to supporting innovation with tax credits – and provide a way forward for innovative firms looking to make a difference.

SPRK Capital can help you access your R&D tax credits quicker with a SPRK Advance. Find out more about the SPRK Advance and how you can make your R&D expenditure go further here.

Alternatively, get in touch with a member of our team. We’d love to hear from you.