The state of R&D tax credits and how they can help growth companies

Here's how to make the most of R&D tax credits to boost innovation and grow your business.

Any economist will be quick to point out the power of incentives. A direct cash incentive or an indirect scheme to promote certain types of economic activity usually delivers the intended results. The government’s tax policy shapes these incentives and acts as a catalyst for economic change. The best example of this is the UK’s R&D Tax Credits scheme. Introduced in the early 2000’s and reshaped in 2008, the government’s tax relief for expenses related to research and development is a crucial part of promoting entrepreneurship, risk-taking, and technological innovation in Britain.

Here’s how the most cutting-edge companies across the country are using these tax credits to fuel growth and expand services.

Tax credits help growth

Tax credits for research and development are designed to spur advances in technology. This means that they can be used by any company, regardless of size or industry, to offset the money that is invested in making business processes better, faster, or cheaper.

A recent study by the London School of Economics’ (LSE) Centre for Economic Performance (CEP) found that these tax credits had the desired effect. They described the credits as a rare example of a public innovation policy that actually works. The researchers noted that the UK suffers from a productivity problem. For an equivalent hour of work, the UK has 30% lower productivity than similar economies like France, Germany, and the US. Since 2000, HMRC’s R&D tax credits have helped mitigate this issue and boost innovation. In fact, the study notes that total R&D over this period would have been 10% if the tax breaks did not exist.

While it is encouraging to see evidence of a policy’s positive impact, the tax credit scheme is far from perfect. Businesses are either unaware of the tax credits, misinformed about how it works, or confused by the system of filing claims.

Figuring out rates

One of the reasons businesses turn to professional consultancy platforms like Tax Cloud to file claims for R&D tax credits is the complexity of the system. Companies must first tally the total ‘qualifying expenses’ for the tax credit scheme. Then the company must understand and apply the enhancement or surrender rates appropriately to get their claim.

HMRC has adjusted these rates every year in recent history. There’s a good chance these rates will continue to be adjusted year-on-year going forward. At the moment, small and medium-sized companies can claim 100% and 130% of normal deductions and qualifying costs respectively for a total of 230% deduction. Loss-making SMEs can also claim a tax credit for up to 14.5% of qualifying losses.

Professional platforms can help account for subcontractor costs, company structure, and staff expenses in the process of filing a claim for tax credits.

Final thoughts

The UK’s R&D tax credit scheme has been successful in boosting innovation across the country. However, the system is still relatively complicated and there are common misconceptions about how the credits work. This reduces the impact of this policy. Companies may require professional help to maximise the returns from these tax credits and boost growth efficiently.

Praseeda Nair

Praseeda Nair

Praseeda was Editor for from 2016 to 2018.

Related Topics

R&D tax credits