A big reason why the UK is an attractive place for small businesses is the existence of research and development (R&D) tax credits. Introduced over 20 years ago, they encourage firms to spend more on R&D because they get a proportion of the costs back (if the business makes a loss) or pay less corporation tax (if it makes a profit). Sure, firms sometimes have to wait up to six months after submitting their annual company tax return to get the benefit, but at least everyone knows how the system works.

Recently, however, the UK government has proposed various changes, which were discussed at a business briefing held on behalf of the Business and Innovation Group of the Institute of Physics (IOP) earlier this year. The event, which I hosted, featured speakers from three financial companies recommended by IOP members. The speakers gave an overview of the UK’s R&D tax-credit schemes, explained how they work, and discussed the possible impact of the changes.

Of particular interest to large firms is the Research and Development Expenditure Credit (RDEC). It encourages such firms to invest in R&D by essentially cutting their tax bill by up to 13% of what they spend on R&D. The good news is that from 1 April 2023, the figure has been increased to 20% of these “qualifying costs”. That’s great for large multinational companies as R&D tax credit schemes can make all the difference when deciding which country to set up and run R&D projects in.

As for small- and medium-sized enterprises (SMEs), they could previously apply an enhanced deduction rate of 130% of qualifying R&D costs. Essentially, this provision mean that companies that have failed to make a profit in a particular year can receive money back from the state, which can be vital to fund future development. From 1 April 2023, however, this figure has been reduced to 86%, which means less money back.

Winners and losers

SMEs can, of course, use both schemes but in reality most of their claims will be under the SME scheme. On the flip side, however, the scope of what counts as R&D has been expanded greatly. Firms can now also include the costs associated with data processing and cloud computing; they can even include work on pure mathematics. Overall, the changes will mean there will be both winners and losers.

Firms will also have to grapple with changes to the ways in which they submit their R&D tax claims. From 1 August 2023, companies now have to fill in an “Additional Information Form” before filing their corporation tax return containing the R&D claim. The extra paperwork is designed to cut down on the number of inflated, fictitious or fraudulent claims. But completing the form, which involves explaining exactly what you spent your R&D money on, is a time-consuming affair.

In fact, there is now an entire industry of advisors and accountants who earn money by helping companies submit their claims. Some law firms even offer these services, combining a legal knowledge with tax insights to ensure your claim is technically sound and legally defensible. If you’ve got a business, it’s worth thinking about using such firms as they provide an added layer of protection and make it much more likely that your claim will succeed.

Why these tax benefits could help you start a business

What’s more, the lawyers usually operate on a “no-win-no-fee” basis so if your claim fails, you won’t have to pay a penny. If you do succeed, you’ll typically pay them up to 25% of the benefit gained, with the precise value depending on what you negotiate and the size of the claim. Yes, that’s money that could have gone on further R&D but the advisors can pinpoint activities you might not have realized could count as R&D, which means you can end up saving more than you spent on fees.

Simpler and better

The other good news is that the UK is starting a consultation on reducing this complexity to create a single, simplified R&D tax-relief scheme. First announced in 2022 by chancellor Jeremy Hunt as part of a wider review of R&D tax relief, the government says it wants to “unlock the potential of SMEs”. The consultation document promises to raise R&D tax relief from £6.7bn in 2020–21 to over £9bn in 2027–28 but in a way that “ensures better value for the taxpayer”.

In its response to the consultation, the IOP policy team, headed by Tony McBride, has expressed its support for a single scheme, provided that it maintains the benefits each separate scheme currently affords and that no firm doing R&D becomes ineligible. I personally feel the consultation is a great opportunity for the UK government to fine-tune its R&D tax credit schemes and make the new version much less complex. That will go a long way to boost the UK economy and increase the global competitiveness of British physics-based businesses, which can only be a good thing.

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• Source: https://physicsworld.com/a/heres-why-rd-tax-credits-are-vital-for-physics-based-businesses/