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Affording Research and Development Costs

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Research and development is an important part of any growing business, whether it is following the latest Google changes and up dates, to building prototype models to prove your concept.

However, the cost can vary widely depending on the sector you are in, after all, it doesn't cost much more then "man hours" for someone to be researching the latest online changes, where as going to specialist companies for a prototype may cost considerable amounts of money depending on the brief and equipment used (for example, waterjet cutting machines).

So how do you go about paying for your research and development if you don't have large amounts of spare capital at hand? There are actually two routes you could go down in this instance:

  • You could apply for an Innovation, Research & Development Grant, or

  • You could use your Research & Development Tax Credits.

Innovation, Research & Development Grants:

The SMART scheme was introduced back in 2001 by the UK government to encourage research & development (aka R&D) in small to medium enterprises, the idea was to achieve a more competitive British industry through developing innovative technological products and processes.

Under the new SMART grant scheme there are three different types of projects that you can approach for grant funding. As with most government grants you will be awarded a percentage of the total "qualifying" payout that you have spent during the course of the project, and will be paid retrospectively once you have provided proof of the expenditure.

The three project types are:

  1. A Proof of Market Grant - The Proof of Market grant is available to allow your company to conduct market research, market testing, and competitor analysis. It also will allow you to tackle any intellectual property issues and planning costs that may be associated with taking the product or service to the marketplace. The project can last no longer then 9 months and will attract a maximum 60% grant up to the value of 25,000.

  2. Proof of Concept Grant - The Proof of Concept Grant is available to allow the exploration of the technical feasibility and commercial potential of technological advances, new products or innovative process, the project can last 18 months and will attract a 60% grant up to the value of 100,000.

  3. Development of Proto-type Grant - The Development of Proto-type Grant is available to fund any required demonstration prototypes, the protection of the intellectual property, any trials and testing that may be needed (including market testing). The project can attract a 35% grant for medium sized businesses and no more then 45% for small businesses up to a maximum of 250,000. The project must last no longer then 2 years.

If you require more information on the grants available then contact the Technology Strategy Board via their website if you live in the UK, for Scotland contact Scottish Enterprise and businesses in Wales should contact the Welsh government directly.

Tax Credits:

Tax relief for Research and Development was introduced for a number of qualifying expenditures that were incurred in relevant R&D work from the 1st of April 2000, however, until April 1st 2002, the scheme was only available to small to medium enterprises only but since 2002 this was extended to include large companies as well.

The HMRC defines R&D activities as those that "directly contribute to achieving in science or technology through the resolution of scientific or technological uncertainties", this definition actually covers a wide range of commercial activities, many of which most people would not assume to be covered by their given definition.

Activities that are designed to improve something or duplicate its effect by seeking an "appreciable improvement" to existing technology are regarded by the HMRC to be activities that qualify for Research and Development Tax Credits so long as the improvements sought by the company would be considered by a competent professional to be "non-trivial" and "not readily deductable".

The current corporation tax rates range from 20-24% meaning that substantial savings can be made. Companies making a loss are not excluded from these benefits and the tax credits can be claimed on any losses that were enhanced by R&D expenditure instead of having to carry the losses forward and offsetting them against future profits. You can also claim retrospectively so long as the expenditure was within the last 2 accounting periods and can sometimes result in a significant repayment of your corporation tax.

For more information on if you qualify for R&D Tax Credits, talk to your account or book-keeper or contact the HMRC directly.


 
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