Insights

First unveiled in 2000, R&D tax credits are a prime example of a policy with the potential to really benefit the 3.5 million small company owners that form the backbone of the UK’s economy. Why is it then that only 1% of SMEs have made claims?

At the time of their original launch, there was a misconception that R&D tax credits were only available for lab-based researchers in white coats. Thankfully this perception has now moved on but nearly 2 decades later, due to a continued lack of awareness about how R&D is defined for the purposes of this tax relief, millions of eligible UK companies are still missing out. Latest estimates suggest that almost 60% of SMEs could be accessing the relief but are not, primarily because they don’t realise they qualify.

Understanding the broad policy definition of R&D

On its website, HMRC defines R&D for the purpose of this initiative as follows: “The company must be carrying out research and development work in the field of science or technology. The relief is not just for ‘white coat’ scientific research, but also for ‘brown coat’ development work in design and engineering that involves overcoming difficult technological problems. This can include creating new processes, products or services, making appreciable improvements to existing ones and even using science and technology to duplicate existing processes, products and services in a new way. But pure product development in itself does not qualify.”

One of the most commonly overlooked opportunities which qualifies as an example of ‘using science and technology to duplicate existing processes, products and services in a new way’ is in the potential to claim for an investment in developing new IT systems. For instance, Lesley Stalker at Surrey accountancy firm RJP LLP recently advised a company that had developed a new software system to improve its own internal processes and they were able to secure a tax credit of £250,000 after submitting an enhanced claim in excess of £1m.

Extended commitment to supporting R&D

The current government has repeatedly confirmed its commitment to continuing R&D tax credits and has in fact introduced a number of further enhancements to make it easier to access and more valuable and HMRC have recently confirmed that companies have the ability to claim for business expenses incurred by employees during the course of the ‘research’ and reimbursed by the company.

UK registered SMEs with less than 500 employees and up to €100 million in annual turnover, or €86 million in balance sheet assets, can claim for the enhanced rate of tax relief, which is currently 130%. This means that for all allowable costs invested into qualifying R&D activities, they can claim 230% in tax relief.

If the ‘research’ has been conducted by a subcontractor rather than a staff member, it is still possible to claim tax relief but at a reduced rate; up to 65% of costs can be claimed, depending on individual circumstances. Where this is not possible, because for example the company is claiming under the Research & Development Expenditure Credit (RDEC) scheme for larger companies, the subcontractor can alternatively make a claim for relief.

It is possible to obtain R&D tax credits for a project in which two separate companies collaborate, with each entity submitting a separate claim for qualifying costs they have incurred. If however the collaboration involves another organisational entity, for example a university, only the company chargeable to corporation tax is entitled to claim.

Companies that are eligible for R&D tax credits under the enhanced scheme (i.e. SMEs) and that have never made a claim in the past, can also now get advance assurance from HMRC that a future claim will qualify. This means they can get the reassurance of future tax relief before actually embarking on a project. This applies provided the company’s tax payments are up to date and they have never been involved with tax avoidance schemes requiring a disclosure.

In spite of the valuable cash flow improvements companies can obtain by making a claim, eligible companies across all sectors, from finance, insurance, marketing and design plus the travel sector, are still missing out. If you’re reading this and your company is engaged in projects that could qualify for R&D tax credits, you could well be wondering whether you could be making a claim.

Start by asking yourself the following questions. If you can answer positively to each one, there is a good chance your company is eligible for some tax relief.

• Are you working on an innovative project?
• Does your project have a defined start and end date?
• Is it in a field of science or technology?
• Is the work you are doing improving what is currently available in the marketplace?
• Are you pursuing a scientific or technological advancement?
• Is there a degree of scientific or technological uncertainty involved?
• Is the knowledge or capability involved readily available? Or is it deducible by a competent professional?
• Are you spending time investigating and testing the results?

RJP have developed an instant R&D tax credits test which is free of charge and will give you an immediate indication of whether you could be eligible for some tax relief.

Our friends over at smallbusiness.co.uk have lots of interesting articles on the subject, as well as other that affect small business. Well worth checking out!

To learn more about eligibility and making R&D tax credits claims, email partners@rjp.co.uk.