What is R&D tax relief?
For companies developing innovative products, processes and services, R&D tax credits can provide an important source of funding through cash reimbursement or tax deduction. It is one of the biggest tax relief schemes available to SMEs and can be worth as high as 33.35% of a company’s R&D expenditure.
The relief is ultimately geared towards problem-solving businesses. Under HMRC guidelines, R&D is a project or activity, which “seeks to achieve an advance in science or technology [through] the resolution of scientific or technological uncertainty.” This definition is deliberately vague, as to open the relief up to as many businesses as possible.
It is worth noting that R&D is still deemed to have taken place even if that project is not successful – ultimately it’s the “seeking” that matters.
For businesses that have just become aware of R&D tax relief, the good news is that claims can be made retrospectively. By amending your CT600, you can file a claim for R&D activity carried out in the past 2 years.
Some examples of companies that might be eligible for R&D tax relief are:
- An IT company integrating new software in its products or developing new systems for its customers
- An engineering company developing its manufacturing process by exploring new cost effective materials
- An architect looking to improve the efficiency of energy use in a house or construction
- A digital agency improving the performance of an app or website
- A veterinary referral company performing complex experimental techniques and surgery
Many business owners wrongly think R&D tax relief is reserved for companies with labs full of scientists in white coats. The reality is any company subject to Corporation Tax that can demonstrate it is attempting to overcome a technological or scientific uncertainty can qualify.
We work with a vast range of businesses all over the UK ranging from architects, vets and manufacturers to engineers, exhibition designers, digital agencies and breweries. The relief really is open to all industries.
Currently, there are two different schemes available for those who meet HMRCs requirements: the Small or Medium-sized Enterprise (SME) Scheme and Research and Development Expenditure Credits (RDEC).
SMEs are companies employing less than 500 staff with revenues less than €100m or gross assets that don’t exceed €86m (companies exceeding this may still be able to claim under the RDEC scheme).
The RDEC scheme allows large companies to claim R&D tax credits for work carried out on or after 1 April 2013, though the rate of relief is much lower than that available to SMEs. The net cash benefit is currently 8.8% of qualifiable expenditure. RDEC replaces the older Large Company scheme as of April 2016.
What types of expenditure relate to R&D?
For a number of businesses we work with, the expenditure we identify as R&D isn’t directly labeled as such. Because of this, many often think they’re not actually eligible for tax relief. This really couldn’t be further from the truth. Think back over the past 2 years and ask yourself, have I…
- Looked for a more efficient or more effective solution
- Created a new product or made improvements to an existing one
- Explored new methods or processes
- Trialed new materials or computer code
- Solved problems or overcame issues for customers
If the answer is yes, the chances are you’re probably eligible for R&D tax relief.
The type of activity which a company can claim under is split into two categories: ‘direct’ and ‘indirect’.
Examples of direct activities are:
- Scientific or technological planning, design, testing, and analysis
- Activities which design or adapt software, materials or equipment
Examples of indirect activities are:
- Information services e.g. preparation of R&D reports
- Indirect supporting services e.g. maintenance, security, clerical
- Ancillary services e.g. paying staff, leasing laboratories and equipment
- Indirect activities would all have to be undertaken for the R&D project
When breaking down R&D expenditure, companies are able to claim for things such as staffing costs, software, consumable or transformable materials, costs of work done by subcontractors and external workers and costs of clinical trial volunteers.
Although it is useful for companies to keep a timetable of their R&D expenditure, claims can be based on a reasonable estimation of what is being done. When making retrospective claims, dialogue between our advisors and your team is enough to verify R&D activity.
Examples of an R&D claim
The following examples apply from 1st April 2015:
A loss making SME has allowable R&D expenditure of £100,000
The enhanced claim is £100,000 x 230% =£230,000
The company decides to surrender this loss for a cash repayment. The amount they would receive is £230,000 x 14.5% = £33,350
A profitable SME has an allowable R&D expenditure of £100,000
The enhanced claim is £100,000 x 130% = £130,000
The amount is then an allowable deduction against profits subject to Corporation Tax. So the further tax relief it would receive would be £130,000 x 20% = £26,000
How can we help?
In order to ensure they are maximised, handled efficiently and don’t trigger later investigations from HMRC, R&D tax relief claims require specialist advice – that’s where we come in.
Gathering the correct information and data can often be a complex and time-consuming process, with potential for inaccuracies and business risk. While claims can be made by your current accountant, we often find that those who not have the expertise to handle such an intricate part of technical tax often underestimate what can be claimed for.
By using expert advisors, you are minimising the risk of under-claiming or over-claiming. We work by understanding your operation through building relationships with relevant members of your team and learning about the processes and techniques involved in your R&D. That way, when it comes to making your claim, we can be sure that we maximise the relief available to you.
We also have a close working relationship with HMRC and so have an in-depth understanding of their needs, requirements and legislation. As a result, our process is well refined and you can generally expect to have cash in your bank within 4 to 6 weeks.
Why Haines Watts?
Our team at Haines Watts is comprised of personable, plain-speaking professionals who are able to translate intricate tax legislation in a way which can be easily understood by you and your team.
Our extensive experience advising companies in numerous industries has helped to identify over £140m of qualifying R&D expenditure. In the first 6 months of 2017 alone, the total amount of relief we raised for companies overcoming technological and scientific uncertainties was £8.2m.
We also have a 100% record in claiming R&D tax credits.
When choosing an advisor like Haines Watts, you have the strength of a national network behind you alongside the tailored approach of a local firm. Specialist R&D tax consultancies only go so far in terms of understanding your business needs and building long-term relationships.
We appreciate that other business and tax matters inter-relate with tax credit claims often influencing other areas of your business. As such, our expertise goes beyond just R&D. Our technical tax team can also advise you on things such as patent box, income tax planning, profit extraction, corporate re-organisations, company sales, mergers and acquisitions, inheritance and capital gains tax.
At Haines Watts, we combine expertise within this niche area of tax alongside our own industry experience.
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