Tax credits are given by governments all over the world as incentives to corporations and individuals to spend towards desirable goals. So many governments allow tax exemptions on the money paid towards corporate social responsibility or CSR, meaning the money spent on the social uplift of the people.
Just like CSR, the government in the United Kingdom allows tax credits based on the amount that a company spends towards advances in research and development (R&D). If your company has spent money on R&D, you must consult accounting firms Manchester to get full credit from the government.
Things You Need To Know About The R&D Tax Credit Of The Government Of The United Kingdom
1. The Rate Of R&D Tax Credit
There has been a steady rise in the percentage of money spent on research and development that can be claimed as tax exemptions. So in the year 2017, the limit was 11% of money spent on research and development work.
In the following year, i.e., 2018, this limit was revised upwards, and 12% of the money spent on research work could be claimed as tax exemption. In 2020, the 12% was changed again, and 13% of the expenditure could be claimed as an exemption. In 2024, an announcement was made that the rate would be revised to as high as 205 percent.
So it will not be wrong to say the government in the United Kingdom is highly favorably disposed toward spending money on research activities, and the trend is not expected to be reversed anytime soon.
2. The Inventions That Qualify Under The R&D Tax Credit
However, not all investments will qualify for tax exemption, and it is best to discuss the matter with accounting experts to prepare a strong claim. The general rule of thumb is that the company should be able to prove how a particular venture looked for an advance in the field of science and technology.
Science and technological innovations are rewarded if they advance the current level of understanding. Generally, the process of research has specific roadblocks and challenges. So if a company can show how its investment leads to overcoming a major challenge for science, then they have a strong claim.
Again, if a company shows how it overcomes a situation of uncertainty in a technological field, then they have a strong claim to getting the tax credit. The most critical point is that the advancement made should be novel or incremental, and using or re-using an existing technology does not have much worth.
Most companies try to show proof of novelty by demonstrating that previous attempts made in the field could not find a plausible and practical solution to a standing problem.
Again, only scientific ventures qualify for the tax credit, and any novel approach in the field of applied science subjects like economics will not be eligible for the tax credit.
According to reports, 225000 pounds have been claimed by corporations under R&D credit in the United Kingdom.
3. The Tax Credit For Research And Development Is Highly Beneficial For Corporations
Tax credit for the money that is spent on research is highly beneficial for corporate entities. These exemptions are applicable in cases of both profit and loss. Again, the increase in a company’s earnings before interest and taxes (EBIT).
The EBIT value is often taken as an indicator of a company’s profitability. So if the profitability increases, the company will find it easier to raise funds from the market. More people will be willing to buy shares and equities of a profitable venture, so the cost of borrowing will go down.
A low cost of borrowing from the market has enormous benefits for a business organization as it allows a business to quickly increase its operations or launch new ventures.
4. Most Countries Encourage R&D Activities
The United Kingdom offers a comprehensive scheme to encourage corporations to invest in research and development. However, the United Kingdom is not the only country that does so. Most developed countries try to spend a large part of their GDP on advancing science and technology. This is because advancing the frontiers of human knowledge has several long-term benefits for mankind.
For instance, when a company creates a new drug that can cure an incurable disease, then that drug becomes highly valuable. The innovative drug can save many lives, and it can also fetch a considerable price in the open market, which in turn can increase the originator country’s GDP.
Again, any innovation that reduces the impact of effluents on the environment will go a long way in promoting human health and well being of biotic life. Likewise, most developed countries have international obligations to cut fossil fuels and reduce the emission of air pollutants. So if a firm creates a new green fuel, then most governments will reward the corporation which brings in such an innovation.
Ways In Which A Good Accounting Firm Can Help You Get Your R&D Tax Credit
- An experienced accounting firm has the expertise to understand what all will qualify for the tax credit and what all will not. So they spruce up your claim by including worthy investments and excluding less worthy ones.
- An experienced accounting firm will make sure that you do not miss out on any opportunities. Even the biggest firms miss out on opportunities where they could have claimed a tax exemption.
By carefully understanding your vision and mission, good accounting will leave no stone unturned to ensure that you get the maximum benefit of the government schemes.
Conclusion
Most developed countries strive to contribute a significant portion of their GDP towards scientific developments and technological advancements. Most private corporations are unwilling to invest in research and development activities as the investments take a long time to give results, and failures are way too frequent.
Hence, public funds and grants from Federal agencies are always at the forefront of promoting advances in science and technology.
