Small firms missing R&D tax breaks

2 min read

Small businesses are missing out on millions of pounds of government tax breaks designed to encourage innovation in the UK, according to research by business advisory firm Deloitte. Less than half (45 per cent) of eligible small and medium sized enterprises (SMEs) are taking advantage of research and development (R&D) tax relief, and almost a quarter (24 per cent) that haven't claimed are unaware that the incentive exists.

Of the 563 companies interviewed, over 80 per cent that have yet to make a claim employ less than 50 technical staff, suggesting that the scheme is not reaching the smaller enterprises that could most benefit from the cash flow boost of the repayable cash credit.

David Cobb, head of R&D tax services at Deloitte, said, "It's ironic that the firms that can benefit most are the ones that are missing out. The reliefs cover much more than traditional scientific research performed by people in white coats, and specifically apply to experimental development activities in manufacturing and software. Any company developing new products, materials, processes or services may be eligible to claim tax relief."

Deloitte's research shows major regional differences in the number of SMEs making claims. Less than 10 per cent of the firms questioned in the Midlands are applying for the tax relief, and only one-third of those in the North East and South West. Companies in London, Scotland and Northern Ireland appear to be the most switched on, with some 55 per cent of eligible companies making a claim.

Cobb said, "The positive news for SMEs is that the majority of firms that submitted a claim for R&D tax relief found the process fairly straightforward, with only a third rating one or more aspect of the process as challenging. However, the main source of difficulty still appears to be reaching agreement with tax inspectors on the interpretation of the DTI guidance on which activities are eligible for relief.

"Changes introduced at the last two Budgets show that the government recognises the need to help more SMEs navigate the R&D claim process. However, further work is required to simplify the process and raise awareness of the scheme if the government is to meet its ambitious target of increasing R&D spend to 2.5 per cent of GDP by 2014."

"Surprisingly, three-quarters of the firms that have made a claim reported that the introduction of the relief had not caused them to change their R&D investment decisions, and five per cent had reduced their R&D spend. This is particularly disappointing given that the tax credits were specifically designed as an incentive to increase the levels of business expenditure on R&D, and we urge SMEs to consider if they are making the most of what is available to them."

R&D tax incentives work by reducing corporation tax payable for tax paying companies. For companies in a loss making position, it can create cash repayments from HM Revenue and Customs of up to 24 per cent of the qualifying R&D expenditure. For every £1,000,000 spent on qualifying R&D a large company can claim up to £75,000 of benefit. An SME spending the same amount can claim a reduction in taxes of up to £150,000 or, if loss making, a cash repayment of up to £240,000.