insideKENT Magazine Issue 23 - February 2014 | Page 147

BUSINESS RESEARCH & DEVELOPMENT TAX RELIEF THE SME SCHEME: ARE YOU MISSING OUT? By HM Revenue & Custom's (HMRC) own statistics, the majority of small and medium enterprises (SMEs) are missing out on making claims under the Research & Development (R&D) tax legislation. According to HMRC’s estimates there should be approximately 50,000 SMEs qualifying for R&D tax relief. Indeed, this figure could be as high as 150,000 qualifying companies, according to some HMRC sources. By contrast the latest available R&D tax credits statistics – as published in August 2012 – show that in 2010/11 only 8,170 claims were made. In fact only 21,000 different companies have made a claim under the SME scheme since it was launched in 2000/01. SO WHY IS THE TAKE UP SO LOW? There is a misconception that the scheme is complex, that it only relates to pure research facilities and that only scientific based companies can claim. This is far from the reality of the situation as innovation, extension of technical or scientific research and technical problem solving occurs throughout many industries. Again, by referring back to the HMRC's own statistics for 2010/11, the claims by industry sector were: Business services – 46.9% Manufacturing – 36.5% Wholesale/retail trade – 6.3% As such there is a high chance that if an SME is undertaking innovation or solving technical problems in any industry type, there could be an R&D tax credit claim to be made. The relief is granted on a project-by-project basis, and in order to qualify a project must 'seek an advance in science or technology through the resolution of scientific or technological uncertainty'. A word of caution is needed here as it should be noted that the mere increase in an SME's own knowledge base will not necessarily qualify, unless it also satisfies the afor ementioned quote. When a project does qualify for relief, a company can claim an additional tax deduction of 125% of qualifying expenditure, whereby costs have been incurred on or after 1st April 2012. For example, a qualifying spend of £100,000 could, after the enhancement, give rise to a total of £225,000 claimed against taxable profits in the company’s corporation tax computation. This can then lead to a reduction in tax payable, or should a company be loss making, it is possible to make the claim for R&D tax credits and surrender the losses generated for cash. For R&D tax credit purposes an SME is defined as an entity with fewer than 500 employees and either an annual turnover not exceeding £100 million or a balance sheet not exceeding £86 million. It should be noted that if the SME is part of a larger enterprise it may be classified as qualifying under the large scheme if in aggregate the overall enterprise fails the SME limit tests. Other extracts from HMRC’s statistics also make for interesting reading, particularly with regard to the location of where the SMEs making the claims are located. By volume some 3,855 claims were made by SMEs in the areas classified as East of England, London and the South East – which represents some 47% of the total claims for 2010/11. By value these claims total £206 million which is 60% of the total value claimed for 2010/11. This clearly demonstrates that qualifying activity is being undertaken in the South East, London and Eastern regions, and at considerable levels. It is essential that SMEs take advantage of the R&D tax relief rules if they are not already doing so, but to do so companies must be properly informed about the scheme. If you would like to discuss R&D tax relief, please contact your usual Wilkins Kennedy advisor or Rick Schofield at the Ashford office on 01233 629255 or [email protected]. www.wilkinskennedy.com 147