Are you missing out on R&D tax credits?
What is the R&D tax credits regime?
Research and development (R&D) tax credits are a favourable tax regime put in place by the Government many years ago, with the aim of encouraging companies to spend more on R&D – considered essential for economic growth in the UK and leading to greater investment in innovation.
Published in September, HMRC’s Research and Development Tax Credit Statistics indicate over 170,000 R&D claims have been submitted since 2001, with more than £16.5 billion claimed in tax relief. In 2015-16 the total number of claims for R&D tax credits rose to 26,255, an increase of 19% from 2014-15. There has been a significant increase in the number of SME claims in recent years, 21,865 claims were submitted in 2015-16, up from 17,875 in 2014-15, a 22% increase.
You can claim R&D tax relief under the SME Scheme if you have:
- Less than 500 staff
- Turnover of under €100 million or a balance sheet total under €86 million
For an SME, a successful claim would lead to a potential deduction rate of 230% of your qualifying expenditure. As shown in the example below, for a loss making company, this would lead to a potential cash repayment of 33.35% of that expenditure.
Large companies can also claim R&D tax relief on qualifying projects but this is under the Research and Development Expenditure Credit (RDEC) Scheme. The RDEC Scheme is less generous than the SME Scheme and is available to large companies and SMEs subcontracted to do R&D work by a large company. The RDEC Scheme operates differently to the SME Scheme and gives relief in the form of a taxable credit for 11% of your qualifying R&D expenditure giving net relief of 8.91%. For early stage companies this can provide an invaluable cash injection at just the right time. It is even possible through some providers to receive advanced funding on your claim.
Are you eligible for R&D tax credits?
R&D tax reliefs are available to any UK company undertaking R&D that results in an advance in the field of science or technology. Qualifying activities extend much further than you might expect.
The company must have invested in R&D that is looking to resolve an uncertainty that cannot readily be resolved by a competent professional in the field. Whether this is designing a new process, improving an existing product or creating a completely new system, all have potential to be eligible for the R&D relief. Where qualifying R&D is being undertaken, the generous R&D tax relief can be claimed on qualifying expenditure which is limited to costs incurred on staff, software, consumables, sub-contracted R&D and externally provided workers.
Some of the ‘triggers’ that may mean a company qualifies for R&D tax relief include:
- Employment of software developers, engineers or scientists
- Development of own software, or outsourcing the development/customisation of software
- Ownership of patents
- Development of internal software or non-software processes that improve efficiencies, by way of reducing production time and or improving scalability
- Combining existing technologies to improve processes in a unique way
- Subcontracting technological, design, manufacturing or scientific work
Many eligible businesses carrying out qualifying R&D are missing out on making a claim, because they are either unaware of the reliefs available or do not believe that their R&D expenditure is qualifying.
Brexit implications for the R&D tax credits regime
The effect of Brexit on the R&D regime is very much unknown, the latest statistics show a positive increase in the number of claims year on year and it seems the UK government is still keen to position itself as ‘open for business’. Kweku Ackom-Mensah, Head of Partnerships at GrantTree, a provider of R&D tax credits and innovation grants explains: “Any reductions in SME-focused government funding and tax subsidies would look to most business owners like a clear deviation from the objective that the R&D regime set out to achieve, incentivised innovation in UK business. With lucrative equivalents in Ireland, Canada, Australia and to a lesser extent the US, it would be a significant leap for the UK to withdraw this well used and indeed relied-upon piece of legislation.”
Certain funding bodies tied to EU funds (for example Horizon 2020) are also expected to be either replaced by new UK-only equivalents or effectively extended in a newly brokered deal, so as not to penalise or hamper UK innovation.
How Kingston Smith can help?
Here are a few examples where we have helped our clients to make successful R&D claims:
- Design engineering company: we identified £341,000 of qualifying expenditure for a project that involved creating a premium seat design for aircrafts, reducing their corporation tax liability by £86,000
- Telecoms company: we helped through the first four years of their project, with repayable tax credits generated each year ranging from £25,000 to £170,000
- Information management solutions company: we identified £500,000 of qualifying expenditure generating a repayable tax credit of £55,000
If you undertake any research and development in your business, take the opportunity to review your position now. Contact a member of our Technology team who will be happy to provide you with an initial assessment of your potential eligibility. Do not wait too long as the deadline to make an R&D claim is two years from the end of the relevant accounting period so you could miss out on some potentially significant cash or tax savings.