Creative Finance 2: R&D Tax Credits

What could your business do with an extra £57,000?

Before we launch into chapter 2 of our Creative Finance series on the government’s Research & Development (R&D) tax credits scheme and how it could save your business money, we need a disclaimer…

At Bluestone Leasing we try to make our content as interesting and accessible as possible, because we want you to make the best financial decisions for your business. A big part of that is making you aware of how your business could save money through tax relief schemes, but we are the first to admit it’s not always the most thrilling or easy to digest topic. So, while we’ve had a darn good go at explaining R&D tax credits as simply as possible, if you can’t stay awake until end of the article, or you are unsure of whether it is relevant for your business, PLEASE don’t dismiss the topic and make sure you seek advice from a reputable accountant. 

Why are we so keen that you get the right advice on R&D tax credits? Because many businesses do not realise that they can apply, and the average R&D tax credit claim for small businesses in 2018-2019 (according to HMRC’s latest statistics on R&D Tax Credits report dated 30th Sep 2020) was over £57,000.

Can your business afford to let that kind of money slip away?

What are R&D Tax Credits?

Technology and science are moving on rapidly, and in order for companies to stay competitive, they have to keep up. R&D tax credits are a government tax incentive intended to encourage and reward companies that invest time and resources in research and development that could benefit the whole UK economy.

That reward is the R&D tax credits scheme which reduces the amount of corporation tax that a company pays, or acts as a cash payment when companies are making a loss.

Which businesses can apply for R&D tax credits?

Many businesses assume that R&D tax credits their activities would not qualify as research and development, or that only companies working in laboratories or engineering workshops can apply.

In reality, any business that pays corporation tax can apply for R&D tax relief, as long as the research and development they are engaged in is original, unique, and has the potential be a ‘game-changer’ for their industry (not just their company). 

Which projects are eligible for R&D tax credits?

If your company puts resources towards creating a new, improved and original product, service or process (that competitors cannot replicate easily), you could claim tax relief on the money spent in the effort. This might include creating new products, processes, software, services or devices not available elsewhere on the market, or making appreciable improvements to existing products, processes, software, services or devices.

Successful R&D projects may lead to patents, trademarks, or breakthrough discoveries with lasting benefits to the company, but even R&D projects that do not produce results could be eligible for R&D tax credits. 

What expenses would qualify for research and development tax credits?

The expenses your company incurs in trying to overcome challenges and innovate can form the basis of an R&D tax credit claim.

The following cost categories may be included:  

  • Expenditure on staff including gross salaries, employer NIC, bonuses, car allowances, and employer pension contributions.
  • Expenditure on subcontracted R&D activities, e.g., paying a website or software developer, legal fees, branding costs.
  • Expenditure on agency workers.
  • Expenditure on fixed assets, consumables and materials (including light, heat and water).

You can make a claim for R&D relief up to two years after the end of the accounting period it relates to. You’ll need to file an amended corporation tax return and depending on the type of relief you’re claiming, rates may differ.

How much tax could R&D relief save you?

There are two different types of R&D tax relief available depending on the size of your business and if you’ve been subcontracted. 

  • SME Research & Development Tax Relief
  • Research and Development Expenditure Credit (RDEC)

SME Research & Development Tax Relief

The small and medium-sized research and development relief is the most common option for small businesses. You must have less than 500 staff and a turnover of less than £100 million.

This scheme allows you to deduct an extra 130% of qualifying costs from your yearly profits, as well as your normal 100% deduction, totalling 230%. In addition, SMEs that subcontract qualifying R&D activities can claim tax relief on 65% of the payment to the subcontractor.

For example:

Project costAmountAmount eligible for R&D tax relief at 130%
Staff basic salaries£176,672.91£229,674.78
  Staff National Insurance£21,582.97£28,057.86
Subcontractor invoiceTotal = £111,326.70
65% of subcontractor invoice = £75,362.36
£94,071.06

The total amount that is eligible for R&D tax relief is £351,803.70.

Paying 19% corporation tax on that amount results in a cash benefit to the business of £66,842.70.       

There is no minimum claim amount under the R&D Tax Credits SME scheme, and 72% of the claims made in 2018-2019 (according to the latest report) were claims of up to £50,000.

If your company is making a loss, you can claim R&D tax credits worth up to 14.5% of the surrenderable loss.

A note about taxable losses

It’s predicted that only 10% of all companies in the UK in the tax period 2021/22 will be reporting a taxable profit over £250,000.

R&D credits are a primary tax relief and can reduce your company’s Taxable Profits below £0.  creating a taxable loss. The Annual Investment Allowance and Super Deduction, however, are final tax reliefs, and so can only reduce taxable profits to £0. This means that if a taxable loss situation would occur, it would not be tax-effective to utilise a Hire Purchase, loan or to use cash to pay for assets.

Research and Development Expenditure Credit (RDEC)

RDEC is aimed at larger companies, but as a smaller business, you can claim it if you’ve been subcontracted to do R&D work for a large company. As of 1 April 2020, you can claim relief on 13% of qualifying R&D expenditure. In 2018-2019, the average claim by a large company was £332,000.  

To find out if your business could be entitled to R&D relief, your first port of call should be a reputable accountant with the relevant experience. However, it is important that the accountant you choose is covered by indemnity insurance. This insurance will add an additional layer of protection to your claim should your accountant provide inaccurate advice on which activities are eligible for R&D tax relief.

Next time…

In chapter 3 of The Creative Finance Mission series we’ll be covering the topic of saving your business money by switching from petrol and diesel to electric vehicles.

Click here to subscribe to the series and we’ll let you know when it’s been published.

Creative Finance 1: Green Up Your Act with LED Lighting

We won’t insult your intelligence by talking about the impending doom of global warming, pollution, climate change, the destruction of the natural world, or the number of species we are driving into extinction. You’re not here for an environmental lecture, and we’re certainly not qualified to deliver one, so we won’t go there. We’re not even going to mention the fact that we are running out of the fossil fuels that our society has relied on for centuries. Honestly. Not a word.

You’re a busy person and, as much as you want to help the planet, the reason you’re reading this article is to get tips on how to reduce your business’ outgoings. Luckily, this article explains how you can do both.

In partnership with CEMA Lighting, this Creative Finance chapter explores how replacing inefficient lighting on your premises with LEDs could reduce your energy usage at least than 50%, simultaneously saving your business money and reducing your carbon footprint.

Why switch to LED lighting?

LED stands for light emitting diode which is a semiconductor device that generates light when electricity passes through it (thanks to a process called electroluminescence).

That’s as scientific as we’re going to get, but thanks to one of our partners, CEMA Lighting, we can tell you about the practical, financial and environmental benefits of switching to LED lighting.

LED lighting is cheaper to power

LED lighting is significantly more energy-efficient than many traditional lighting systems as it produces more ‘useful lumens’, i.e., less of the energy consumed by the light is wasted through heat dissipation. This makes LED lighting at least 50% cheaper to power, depending on the type of lighting being replaced.

LED lighting is better for the environment

Because LED lighting uses electricity more efficiently, your business’ energy consumption and therefore your impact on the planet should reduce by at least 50%. 

LED lighting lasts longer

After 25,000 hours traditional lighting will be operating at less than 80% of its potential output. An LED lightbulb lasts, on average, for 50,000 hours and, if used efficiently, for as long as 100,000 hours.

LED lighting is low maintenance

In addition, LED lights do not include mercury like fluorescent and mercury vapor lights, so they do not require the same maintenance or management at the end of their life.

LED lighting provides a better quality of light

You can see from CEMA Lighting’s before and after photos just how much improvement can be seen when businesses switch to LED lighting. This delivers improved visibility and colour clarity, safer working conditions for staff and improved security and CCTV footage.

Introducing CEMA Lighting

With the UK government setting a target for carbon neutrality by 2050, CEMA Lighting offer sustainable, cost effective LED lighting solutions for environmentally responsible businesses. Between 2020 and 2021, CEMA saved British companies over 2,000 tonnes of CO2. That is the equivalent to heating the average home in Britain for 1,250 years and the same weight as 350 African elephants.

CEMA Lighting’s Case study of RDC

RDC is an IT disposal and recycling company in Braintree. They were using traditional luminaires that consumed lots of energy.

CEMA Lighting replaced the outdated fittings in RDC’s production area with their exclusive Super Lumen High Bay which delivers an impressive 190 Lumens per Watt efficiency. The LED lighting has an anticipated lifespan of 100,000 hours, consumes 58% less energy and offers a brighter and whiter light, ensuring that the production area was lit to over 300 lux (in line with recommended guidelines).

In the offices, RDC were using panel lights that only converted 70-90 Lumens per Watt. These were replaced with CEMA Lighting’s contemporary Halo panel which uses 75% less energy, has triple the lifespan of the system and provided a modern, sleek and professional design throughout the area.

What was the impact?

  • Annual running costs have been slashed by 59%
  • Annual CO² emissions cut by 299.75 tonnes
  • Light levels on the premises have been improved by 30%

“The benefits from the lighting upgrade have been incredible through improved look and feel to the lighting, reduction in energy usage and a dramatic impact to CO² reduction.”

Cole May, RDC

To read about the many UK businesses that have already benefitted from switching to LED lighting, visit www.cemalighting.co.uk/case-studies.  

How much does LED Lighting cost?

At this point, you’re probably thinking, That all sounds lovely, but how much is LED lighting installation going to cost?, or something to that effect.

The answer to this depends on so many factors such as the square footage of the area you want to light, the lighting being removed, the type of lighting being installed, and the complexity of the job in general, so it’s difficult to estimate a price.

Luckily, CEMA Lighting offer free no-obligation lighting audits to UK businesses. They do this by examining your current lighting system and discussing what requirements you have, as well as considering temperatures or sensitive environments which require food safe or anti-explosive specifications. CEMA Lighting will also conduct a full financial analysis to validate investment with cost efficient changes, which is then displayed in a bespoke cost of ownership outlining savings and return on investment.

Here are just a few of businesses CEMA Lighting have worked with to reduce their annual energy bills. NOTE: These percentages outline the savings focused on commercial lighting installations only.

CompanyReturn on InvestmentAnnual Energy SavingsAnnual CO² Savings
Isuzu1.80 Years79%4.63 Tonnes
JKL Mouldings1.30 Years  66%22.79 Tonnes
Actavo1.86 Years62%7.60 Tonnes
Crittal Windows0.90 Years77%105.88 Tonnes
Donaldson0.82 Years*61%147.32 Tonnes

*In this case CEMA Lighting conducted a grants and funding investigation which covered 19% overall project cost.

Funding Your LED Lighting

Switching to LED lighting in your business could reduce your carbon footprint and save you a significant amount of money on your energy costs, but how will you pay for it?

While some businesses might choose to pay for LED installation by taking cash out of the business, that is not always the most cost-effective route. In fact, an increasing number of businesses are choosing to spread the cost of their LED lighting and other renewable technology over time with a bespoke asset finance solution. Doing so could enable you to:

  • Spread the cost of installation over time
  • Keep cash in your business for other growth projects
  • Manage your budget easily thanks to the fixed repayments
  • Save money on taxes, as leasing costs are 100% deductible.

In fact, in many cases, the money saved by reducing running costs more than covers the monthly finance payment, making the whole project cost positive while simultaneously ‘greening up your act’. The table below illustrates some potential costs vs savings.

Total cost of projectMonthly repayment
(3 year agreement)
Monthly energy savingAnnual energy savingTotal saving per annum
£100,000£3,275£3,470£41,640£2,340
£50,000£1637£1,733£20,796£1,146
£10,000£327.50£347£4,164£234
NOTE: These figures are intended as an illustration, actual costs and savings will vary depending on the project scope and terms of the finance agreement.

Next time…

In chapter 2 of The Creative Finance Mission series we’ll be covering the topic of increasing your business’ income by claiming Research and Development tax reliefs.

Click here to subscribe to the series and we’ll let you know when it’s been published.

Introducing: The Creative Finance Mission

“The ‘bosses’ are panicking. They’re going, ‘Oh, cut back, lose staff. That’s the way forward. That’ll save money.’ Will it? Who’s to say that hiring staff won’t save money in the long run?

“New Girl”, season 1, The Office (UK), BBC Two, 2001.

If you recognise these words, and the noughties TV character who bit his goateed lip as he said them, you are probably cringing a little right now. Sorry.

But, confused and slightly illogical ideas aside, it is also worth remembering that the same man had previously increased profit in his branch by 17% and cut expenditure without losing a single member of staff (neither of which were his proudest moments, by the way). So, inept and fictional as David Brent was, is there something to be said for a more creative approach to business?

We think so, and have put together a brand new series of articles to put our money where our mouth is.

What do all businesses want? More money in, less money out.

It’s a straightforward concept, but easier said than done. Common strategies include increasing prices, losing staff, expanding your product range, working longer hours, switching to cheaper source materials, or simplifying your service, but none are particularly appealing.

Ideally, your goal should be to increase your income and reduce your expenditure without reducing the quality of your service or product, or impacting quality of life for you or your staff. Some might say that it’s not possible, but with some creativity and the right guidance, we know that it is.

Every two weeks we will be releasing a new chapter with tips, ideas, and innovative strategies on how you can be more creative in your approach to business finance. Each chapter will highlight and explain a different financial tactic that could increase the money coming into your business, reduce the money going out, or both.

At Bluestone Leasing we have been helping businesses across all sectors to grow and thrive through commercial finance for over 25 years, including a few economic recessions and a global pandemic, and we have more than enough experience and expertise to share.

But we won’t be the only ones putting our ideas into the “melting pot” (again, sorry), and we aren’t in the business of preaching where we don’t practice. Several of the chapters will be created in collaboration with clients and partners who are living proof that these creative financial tactics can have a significant impact in the real world of business.

If tips and strategies that will increase the money coming into or going out of your business sounds appealing, click here to subscribe to the Creative Finance series and we’ll let you know when a new chapter has been published.

“The growth and stability of UK businesses inevitably leads to a stronger UK economy, and that is what the team at Bluestone Leasing are striving towards. We have so much commercial experience and financial knowledge in the team that could be gold dust in the right hands, and we are excited to share it through our new Creative Finance series.”

Vineesh Madaan, Managing Director, Bluestone Leasing