Research and Development (R&D) tax incentives continue to help the UK to maintain its position as a globally competitive place to do business.
Currently, claims for enhanced tax relief for R&D projects are under-utilised by small and medium-sized businesses, despite being encouraged by the Chancellor to activate this investment to facilitate innovation and product development.
A recent survey has shown that more than 50% of the UK’s smallest companies did not see innovation as a high priority, as a consequence of a shortage of time and resources. 73% of those surveyed also explained they had not used direct support for innovation projects.
What are Research and Development claims?
A qualifying project is defined as one which “seeks to achieve an advance in overall knowledge or capability in a field of science or technology”. Under the SME scheme companies can claim enhanced tax relief of 230% on qualifying expenditure. This means for every £100 of qualifying costs, the company could reduce its corporation tax liability by an additional £130 on top of the £100 spent.
Profitable businesses developing new products and services by achieving technological advancements, in order to improve their offering or the way in which they work can benefit from this scheme.
However start-up businesses, who may not be making trading profits, would also be able to benefit from making a claim. Alternatively, you can affectively cash in this loss and receive a tax credit of 14.5% of the loss.
The purpose of this tax incentive is to boost innovation and stimulate growth in small to medium-sized enterprises. R&D claims can be an important source of funding, one that can spark the next big project for the company or fund the final push for a breakthrough. Businesses who have made claims report making changes to their business culture, expanding their personnel and opening new offices.
Why aren’t more people making R&D claims?
The complexity of R&D tax legislation often deters businesses from making claims. Additionally, there are a number of misconceptions which mislead businesses about the possible benefits.
Despite its definition, R&D does not simply apply to niche sectors or to those who undertake research in a laboratory. Although the qualification of Research and Development is said to be based on an assessment by a ‘competent professional’ in the relevant field; R&D claims are not exclusive to people in white coats!
This is of particular relevance to companies who are investing in IT development and software. Software is specifically recognised by the tax authorities as technology and its development is often challenging and uncertain.
R&D claims can be made for a broad range of project types, not just the development of a product which does something new. You may be advancing science and/or technology by developing a new process or service; making appreciable improvements to existing ones or using them in a new way.
Identifying qualifying expenditure
To decide if your project could qualify for R&D enhanced relief, you will need to assess your project against the following questions. If you are able to answer ‘yes’ to any of the questions, it suggests a further investigation into a claim is warranted:
- Has the business done something to differentiate itself from others in its sector?
- Has the business taken on a particularly challenging project?
- Has the business taken on risk in an attempt to achieve something?
- Has the business invested time and effort into making efficiency-gains?
- Does the business operate in a market which is specialist, niche or highly regulated?
- Does the business employ highly skilled or qualified technical staff?
Investing time in reviewing your expenditure and records with your accountant before making a claim can be very beneficial, as they may well spot projects which qualify that you may not have considered as R&D.
First, they will be able to help you to identity whether there have been any qualifying projects and then in accessing the levels of qualifying expenditure. They will also be able to assist in collating the data and presenting the claim in a suitable way for HMRC as well as making sure the claim is substantiated.
Some companies may find they have historically undertaken projects which would qualify and going forward they can increase the funding or resources made available for this work due to the enhanced relief or the tax credits.
What is a qualifying R&D project?
Although this tax scheme is open to all companies, they must
(i) be subject to corporation tax,
(ii) have undertaken work that attempts to resolve technological or scientific uncertainty,
(iii) have spent money on this work.
There are rules around which costs and how much of those costs qualify. There are four types of costs which can be claimed for; staff, 65% of sub-contractors costs, materials and consumables, and software.
Making a R&D claim
R&D claims can be an important source of funding, one that can spark the next big project for the company or fund the final push for a breakthrough. Businesses who have made claims report making changes to their business culture, expanding their personnel and opening new offices.
To discuss a potential claim, or a project your company intends to carry out, do not hesitate to contact Ian Meaburn. Ian is an experienced accountant who advises many of Myers Clark’s clients about Research and Development projects and innovation challenges. Ian can be contacted by email: firstname.lastname@example.org or you can call on 01923 224411.