Over the last few months I’ve come across several business owners who are aware of the R&D tax credit scheme but don’t think in a million years their business could qualify for it, I wanted to write this blog to highlight some of the opportunities and risks surrounding it and how it works.
You may have heard about everything the government is trying to do to make sure that the UK is the centre of innovation for business and technology in Europe, one of the initiatives available to support that aim is the research and development tax (R&D) credit scheme available to small and medium sized enterprises (SME’s).
Firstly I’d like to mention that R&D tax credits are only available for limited companies so that excludes sole traders from claiming.
Officially qualifying R&D expenditure can be awarded tax relief at 230%, this means that for every £1 spent you can claim £2.30 as an expense to reduce your taxable profits, at a corporation tax rate of 20% you would save 46p, which effectively means that the government is will subsidise every £1 you spend on R&D by 46p.
230% might sound very generous but it’s important to recognise that most business expenditure these days would qualify for 100% relief anyway either as a revenue related expense or through the annual investment allowance so the real benefit of R&D tax credits is lower at 130%.
This means that for every £1 spent on R&D the government in reality only really subsidises it by 26p over and above the normal tax system. Even better though is that R&D isn’t just related to large items of expenditure but can cover staff, material and premises costs.
So what constitutes research and development? Well HMRC seem to explain it quite clearly on their website as the following:
“Your company or organisation can only claim for R&D Relief if an R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability.”
There are thousands of companies out there missing out on this relief because they don’t believe that the innovation they demonstrate qualifies as an advancement in science or technology, the most common misconception is that you have to invent something completely new that the world has never seen before.
To understand if a business could qualify you need to go back to the original reason R&D tax credits were created and that was to improve innovation in UK businesses, perhaps it’s a case of considering whether the business has innovated in the conventional sense of the term.
I’ve heard of R&D Tax credits can be awarded for a range of activities, for example a client who developed a set of card based language tools for the NHS or even a fellow accountant who claimed the recipe development costs for a restaurant client of his.
Also building something based on open source technology isn’t an automatic failure and the context and application will be a key consideration.
To do it properly a R&D report needs to be compiled outlining the nature of the claim, how technological uncertainty has been overcome and why the solution wasn’t readily available, submitting a claim without this information is likely to lead to a tax enquiry.
R&D tax credits are very much an area of fortune favouring the bold, what is there really to lose by sending in a claim and having it reviewed by a HMRC tax credit team? The worst they can say is that it’s unlikely to be accepted and then the business will be back where they started although they will have spent some time doing it.
From experience, this is an area many accountants have overlooked and that often represents opportunities when dealing with new clients who are entitle to claim up to two years after the year end in which the actual expenditure was incurred.
Usually the work I do around R&D tax credits is on a no win no fee basis and payment is only necessary when the claim is accepted by the HMRC tax credit team, if you think you’ve done something innovative then please get in touch, after all what do you have to lose?