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Tax-efficient R&D for SME businesses

12th October 2017

Tax-efficient R&D for SME businesses

Many SMEs, particularly those in the tech industry, or spin-outs from academia, have to invest in Research and Development (R&D) in order to keep ahead of the competition. Nonetheless, R&D is found across many industries and there are SMEs who are unaware that the work they carry out actually constitutes R&D.

R&D can be an expensive venture - highly skilled staff/subcontractors and certain equipment or lab conditions need to be met. Some expenses may qualify for a tax deduction (see list below), although the rules are reasonably complex.

  • Claim for qualifying expenditure sub-contracted to others;
  • Make a partial claim where the project is subsidised or a grant is received;
  • SMEs may deduct 230% of qualifying expenditure from profits chargeable to corporation tax (225% for profits prior to 1 April 2015);
  • SMEs may be able to claim tax credits in cash from HMRC. Where the enhanced expenditure creates a loss, the loss may be surrendered. The tax credit can be up to 14.5% of the R&D loss arising.

What constitutes R&D?

Not all activities that SMEs may regard as R&D will be treated that way by HMRC. Broadly speaking, a project qualifies if it seeks to achieve an ‘advance’ in science or technology. This could be:

  • Experimental work aimed at the discovery of new knowledge;
  • Testing in the search for product, service or process alternatives;
  • Design and testing of pre-production prototypes;
  • Designing products, services, processes or systems that involve new technology; or substantially improving those already produced and installed.

Industry examples: 

  • Experimenting with composite materials to create a luxurious whisky bottle with intricate finishes;
  • Creating an application to distribute a digital magazine;
  • Developing a quality control system which surpasses legislative requirements;
  • Re-designing a circuit board to significantly improve reliability and cost-effectiveness.


In order to qualify, the R&D activity must be relevant to the trade of the company and expenditure must not be of capital nature – capital expenditure is dealt with separately and can qualify for 100% allowances in the year of capitalisation.

To find out if your project qualifies for R&D tax reliefs contact Wise & Co on 01252 711244.



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