Concealed Cash: The Benefits of the R&D Tax Credit

The UK business sector has spent over £23 billion on research and development (R&D) as of 2017.

This constituted the largest portion of the total gross domestic expenditure on research and development in this period.

Every business recognises the value of R&D in creating higher economic value. The government does recognise the role R&D plays not only in individual businesses but in the economy as a whole.

In the year 2000, the UK government introduced a tax incentive that rewards small and medium enterprises (SMEs) for conducting R&D.

Large companies in 2002 received an R&D expenditure credit (RDEC) to stimulate more R&D in this category of firms as well.

Keep reading to find out what benefits a company can derive from an R&D tax credit and allowances.

Lowers Your Tax Bill

The research and development tax credit (not to be confused with the research and development allowance) is an essential tool that can help reduce a firm’s tax liability.

Any business that qualifies for the credit can claim the eligible amount as per their R&D spending. Should your claims qualify, it means that your overall tax bill will be lower than expected.

The reduction in tax liability does not just apply to the present year. If it is your first time, you may also have the ability to claim your last two accounting periods.

Increases Your Bottom Line

Not only can the R&D tax credits help you reduce your overall tax bill, but it can also help build your bottom line.

The nature of this credit is such that it is not just a deduction. It can also be a cash payment in the event taxable profits are not generated in a given year.

As a result, it is an immediate and hidden source of cash for companies that are eligible.

That is money you can invest back into your operations to strengthen your balance sheet.

If, for example, your business has been making a loss, the credits can help by generating a cash payment. Where you have been profitable, these credits will increase your overall profitability due to a reduction in tax liabilities.

Having R&D tax credits on your balance sheet can, on occasions, strengthen your market value since investors often view them as an asset.

Stimulates Innovation

By promoting a tax credit for research and development, the government ends up stimulating innovation in businesses and ultimately, across the nation.

Each company qualifies for a tax break on eligible breakthrough innovation. The innovative output can be for internal or external use.

When your business improves upon a process or a product and gets reimbursed for it, you will be motivated to improve other processes.

Over time, that strategy not only introduces cost savings, but it also builds a culture of innovation.

Another way the tax relief can promote competitiveness is because you can still claim it even if a project was unsuccessful or not completed.

Therefore, if you know that R&D expenditure for a risky project that might end in failure could still be compensated you will be more comfortable to take more risks in seeking out new innovation.

Enhances Competitiveness

In the world of business, every company looks for a way to set itself apart from the rest.

A strategy many firms use is finding something that they alone can use that will give them an advantage over their competitors.

When you develop breakthrough innovation, you are able to perform in a way that your competitors may not easily replicate.

Do You Qualify for R&D Tax Credits?

Many businesses are not sure exactly what makes a firm eligible for research tax credits. HMRC uses a four-part test to determine if you qualify to receive any development tax credit. It’s important these tests are documented and reported in a manner that satisfies HMRC’s requirements.

1. Elimination of Uncertainty

You must be able to show that you have eliminated unknown variables in your development or improvement.

2. An Experimentation Process

You will have to show that you used a systematic process to evaluate alternatives in how to get the results you wanted.

3. A Technology-Led Process

In addition to proving that you used a series of steps focused on finding a solution that adds up to a process, you have to show that technology was used.

4. Prove a Desire to Find an Advance in the Sector

The purpose behind your research and development efforts is critical in determining if you indeed are eligible for the tax credit.

Claim Your Research and Development Tax Credit

Capital Allowance Review Service is a trusted expert that supports businesses and accountants across the UK.

Talk to us today to identify where you might have unclaimed research and development tax credits and how we can help you secure your claim.