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Tax credits for businesses

Tax credits for individuals were introduced in April 2003 and ten years later tax credits for business was announced in the form of Research and Development (R&D) Tax Credits.

The rules increase the expenses you can claim and give you the option to surrender them for a tax refund. The amount of uplift and what you can surrender depends on the type of expenditure. This post is about small businesses.

The first question is what expenditure qualifies as Research and Development?

The tax law is quite broad and states that you must be trying to ‘resolve scientific or technological uncertainties’. This can include creating new products, processes or services as well as changing or modifying an existing product, process or service.

You can include work undertaken for a client as well as your own projects and the work doesn’t have to have been successful to qualify.  The type of expenditure includes:

  • Salaries, employer’s NIC and pension contributions
  • Subcontractors and freelancers
  • Materials
  • Consumables including heat, light and power
  • Some types of software.

From 1st April 2015 you can claim 230% so if you spent £10,000 you can claim £23,000, an extra 130%.

The relief would normally be claimed by deducting from taxable profits in the company’s corporation tax computation. But, you have the option to surrender the claim a tax refund of 14.5%. So, with £10,000 R&D expenditure you could get a £3,335 refund.

One thing to mention, you can only claim 65% of subcontractor costs. So, if you spent £10,000 on subcontractors then you could only claim £6,500 x 230% x 14.5% = 2,167.75.

If you think you may qualify for R&D Tax Credits get in touch.

Image from Flickr by Philip Taylor.

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