Insights

Recent experience working with a selection of different clients has shown that Research and Development (R&D) tax credits are proving very valuable as a source of tax relief. Over the past few years, R&D tax credits seem to have earned a reputation for being difficult to qualify for, with a misconception that your line of business needs to include white coats and laboratories.

Taxtalk's experience as Surrey tax accountants is to the contrary and a wide range of IT and technology companies are reaping the rewards. Applications for projects that are new and innovative, which cut operational time, help to achieve a competitive advantage, or even involve translating software into another language, are being approved successfully.

For example, one client of ours, a software developer specialising in health information management, was able to benefit from £250,000 of tax savings after we put forward an R&D tax relief application showing an enhanced claim in excess of £1m. There are a number of different ways to utilise R&D tax relief depending on your company size and each situation needs to be weighed up to consider the pros and cons. For some businesses, having the chance to reduce their corporation tax bill is the best option since this will have a greater impact than the actual expenditure on allowable R&D costs. It is also possible however to surrender a loss against PAYE or NIC liabilities for the year to receive a tax credit by way of a cash sum paid by HMRC.

The decision over which approach to take requires a careful analysis of the potential tax savings versus the need for short-term cashflow boosts.  In our experience, loss carry forward methods can ultimately yield higher levels of tax relief but not all businesses can afford to opt for this approach, which is where advice from tax experts comes into its own.

Case study: Digital Design Studio specialising in mobile and multimedia applications.

This client’s business is growing very fast due to the current high demand for digital interface design, mobile applications and digital entertainment. We started acting for this client after taking over from their previous advisors. As part of our tax review process and developing an understanding of our clients business, it became clear there would be potential to claim R&D tax relief both for current and past tax years.

A closer look showed the majority of this company’s work qualified as R&D according to the necessary criteria. Some of the review processes undertaken involved identifying how long different employees had been assigned to particular projects and the role of subcontractors, which could in certain circumstances be classified as development costs. In addition, ancillary costs e.g. building overheads such as light and heat, and peripherals including testing costs were included. In total, the application for the enhanced R&D relief allowed the company to enhance their cost base and benefit from 175% relief on qualifying costs.  This equated to a sizeable claim and we were able to create losses of over £1m over two years for the client.

In April 2012, the tax relief available on R&D tax credit claims will increase to 225% and business owners would be wise to ensure they do not miss out on this opportunity. If you think there is even a small chance the relief may apply to your business or idea for a start up, investigate the possibility with a specialist as many, including ourselves, take on claims based upon a no win; no fee approach.

Paul Webb is a tax partner at Surrey accountants, RJP and Taxtalk's R&D tax credits expert.

Contact him at pw@rjp.co.uk.