There are two tax incentives for innovation – R&D Tax Credits and Patent Box. Here we provide you with some information on both.
R&D Tax Credits
You will be eligible for these tax credits if you can demonstrate ‘advancement’ and ‘uncertainty’. In essence your business is eligible if you are taking a risk by innovating, improving or developing a process, product or service. You will be able to claim relief on revenue expenditure, and in some cases also capitalised revenue expenditure, across three main areas: staff costs including gross salary, employer’s NIC, and pension contributions; subcontractors and freelancers; and consumable items such as heat, light and power, as well as materials and equipment ‘used’ and/or ‘transformed’ by the R&D process.
For SMEs the R&D Tax Credit is worth 230%, so it is well worth looking at whether you are eligible. As an example: if your company incurs qualifying expenditure of £10,000, you can deduct £23,000 when calculating your taxable profit, or loss, for corporation tax purposes. As the £10,000 would already be accounted for in the company’s accounts, the balance of £13,000 would be an additional deduction from your taxable profit, giving a corporation tax saving of £2,600 (at a corporation tax rate of 20%).
Whilst the R&D Tax Credit looks at a company’s R&D expenditure, Patent Box, which was introduced in the UK in 2013, looks at the profits from any products that incorporate patents, and reduces the tax paid on those profits – currently by 10%.
Both tax schemes look to support and encourage companies that are innovating. If you believe you may be eligible please speak to Jackie or Andrew.