If your e-commerce business is in the habit of innovating, were you aware that you can claim back some of your costs via Research and Development tax credits? Maybe you haven’t embarked on this path yet but are toying with an idea for the future. Research and Development (R&D) can be a costly process and you often don’t reap the rewards for some time. By capitalising on your tax credits, you may be able to create your next great product.
Regardless of the size of your e-commerce business, the government rewards innovation. While the terms of the Research and Development tax credit will differ depending on your resources, those who are willing to take a developmental risk to create something new will get a helping hand in the finance department. At Unicorn Accounting, we want your business to get all the help it can to encourage growth and greater success.
What are Research and Development tax credits?
Research and Development tax credits support businesses that create something innovative in science and/or technology. This is a surprisingly wide and accessible scope that means many e-commerce businesses could have qualifying activities. Even if your project falls through you may still qualify for what you were trying to achieve.
R&D Tax Credits are applied retrospectively against your Corporation Tax bill in the form of tax relief. For SMEs, the value of them can make a large scale difference on your final tax bill. The tax credits may be spent as you wish, but businesses often reinvest them in further R&D to further push the envelope.
What counts as Research and Development?
For a project to reach the criteria of the Research and Development Tax Credits your advancement must be in an area of science or technology that is neither a social science (e.g. psychology or economics) or a theoretical area such as pure maths.
Your project must also be proven to relate to your e-commerce business. This may mean it is linked to a line of business you have already taken, or it may mean you were investigating a new direction for your business.
As with all accounting, you’ll need to keep stringent financial records on your R&D activities in order to qualify. You’ll need to show the advancement you were hoping for, the “uncertainty” you had to overcome and how you tried to overcome it. You’ll also need to show why the research was necessary by explaining why a professional in the area of the R&D topic could not come up with the solution.
Types of relief
If you are currently a small or medium-sized enterprise with under 500 staff and a turnover of under &euros;100m or a balance sheet of under &euros;86m then you will qualify for the following relief:
- An extra 130% deduction from your qualifying costs from your yearly profit. This is in addition to your 100% deduction, producing an overall deduction of 230%.
- A tax credit if your e-commerce business registered a loss in the year. This varies in value, dependent on circumstances but caps out at 14.5% of your loss.
- If your e-commerce business has blossomed to a large company, then you can claim a
Research and Development Expenditure Credit to off-set your R&D costs.
What this means for e-commerce businesses
You may feel there is limited opportunity for a small or medium e-commerce business to receive Research and Development Tax Credits but there are multiple areas that qualify that you may have overlooked.
Even while you are launching your business you may be engaged in R&D activities. If you are unable to use existing systems to run your business, then you may need to create your own. Creating new user interfaces or e-commerce apps to use on your website are likely to qualify, as are radical modifications to existing systems as well as innovative product lines depending on your niche or industry.
In recent years, e-commerce businesses have been customising products for customers like never before. If you need to create a bespoke tool or process to allow customisation of your product this again is likely to fall into the criteria of R&D.
Data is a powerful commodity and you will likely build up considerable amounts of product data, customer data, competitor data, etc. If you need to create an innovative system to allow you to use this data, it may class as R&D.
While the majority of e-commerce products are variants of those already on the market, if you create a new product or adapt the design of a product to radically alter the product then your business is likely to have spent time and money on R&D. This is probably the most commonly thought of a reason to apply for Research and Development Tax Credits as an e-commerce business but is also less commonly used.
When and how to apply for R&D tax credits
All businesses go through periods of rapid growth and it is during these times that R&D spending is likely to be highest. This may be because you have just launched your business, or it may be that you are looking to expand and take it to the next level. While common sense should always be used, if you believe something could qualify and you have the backup documents there is no harm in applying.
For a full list of what associated expenses you can claim, and how to claim, find out more on the HMRC website.
Maximise your chances
If you need a helping hand to ascertain which activities you should claim for or want some assistance planning your business’ future R&D, get in touch with our team. As e-commerce accountants, experts and advisors, we will ensure your business scales when it’s ready to and claims back everything its due.
The best time to start is now.