Why small businesses are missing out on millions in R&D tax credit relief

Failed innovations can still reward a business’s bottom line, providing extra capital which can be reinvested through the research and development (R&D) and Patent Box tax credits. Mark Tighe explains

Businesses grow by increasing sales. The more and the faster you sell, the quicker you will grow, conventional wisdom tells us. However, there are ways to accelerate or boost business growth without the constant need for new sales or new customers, and these rest largely on one key ingredient: innovation.

First, we should define this overused term.

Innovation does not refer only to new products or ideas but can apply to new ways of doing things, such as altering business models to better suit the needs of customers and staff or adapting processes to improve the end product or service.

All these things could, of course, help you sell more. But such innovations usually require significant time and financial investment before they become commercially viable — and not all “innovations” will prove to be successful.

But even failed innovations can bring rewards that can benefit your bottom line, providing extra capital that can be reinvested to fuel further business development.

It does this through two main vehicles — research and development (R&D) tax credits and Patent Box tax credits.

These two forms of government tax relief are designed to reward and encourage greater innovation across the UK business sector and can amount to tens, even hundreds of thousands of pounds, every year. These are sums that can make a huge difference to a growing business.

In the last 10 years we have helped 14,000 UK businesses claim back more than £221m in tax relief — that’s a lot of extra revenue, all achieved without any additional sales.

But despite this huge pool of capital, the vast majority of companies that are potentially eligible for these valuable tax credits — around two thirds according to our own research — have never made a claim.

There are four key reasons for this:

1) Businesses do not realise their work makes them eligible for R&D or Patent Box tax relief.

2) Businesses do not know how to go about making a tax relief claim.

3) Particularly in the case of the Patent Box, many businesses remain completely unaware of its existence.

4) Businesses worry the claim process will be too time consuming and costly to be worth the effort.

We will now explore these issues and how to overcome them in relation to R&D and Patent Box.

R&D tax relief

There is still a widely held and outdated assumption that R&D applies only to scientists when it actually refers to innovation in many forms across all sectors.

R&D tax relief was introduced by the government in 2000 to reward and encourage innovation by British companies to foster economic growth and success.

With this in mind, HMRC was careful to ensure the definition of what qualifies as R&D could be applied to a huge range of work.

The result… any project that can be shown as seeking to resolve a “scientific or technological uncertainty” qualifies as R&D. This can take the form of a new process, product or service, or it can simply be an improvement to an existing one.

R&D doesn’t even have to have been successful to qualify and claims can be made for two years from the end of the tax year in which the work takes place. R&D tax credits can help to reduce a limited company’s corporation tax bill or be claimed as a cash sum reimbursement from HMRC if the company is loss making.

Statistics released each year by HMRC show hundreds of claims made in sectors as varied as administration and support services, construction, transport and storage, arts, entertainment and recreation, education, health and social work, finance and insurance.

It is true that correctly completing an R&D tax credit relief claim can be tricky as strict criteria must be met as to the qualifying costs incurred. It is easy to get it wrong.

This is why many companies choose to save themselves many valuable staff hours and potential pitfalls by working with a tax relief specialist.

Most reputable tax relief consultancies will work on a contingent fee basis so concerns over big upfront costs can be dismissed.

The average R&D tax credit relief claim we work on is worth £54,000 per year per business so it is worth the time and effort on the part of company executives to work out if they are eligible.

The UK lags well behind many other European nations with overall R&D spending at just 1.1pc of GDP compared to more than 3pc in Sweden, Austria, Denmark and Germany.

It is even further behind the economic powerhouses of South Korea with 4.22pc, Japan with 3.28pc and the United States at 2.76pc.

As a country, we need to start spending much more than this on R&D if we are to continue competing on the global stage. If not, we risk falling behind at a time when we need our economy to perform better than ever before.

It’s high time UK businesses took full advantage of their R&D tax credit relief entitlements.

The Patent Box tax relief

Phased in from 2013, with the full benefit not available until April 2017, the Patent Box tax relief offers a reduced rate of 10pc corporation tax on any income made from patents.

Like R&D tax credits, the aim was to reward and incentivise greater innovation among UK businesses.

While the number of Patent Box claims has risen each year since its introduction, more than half of UK companies are still unaware they can pay less tax on profits if they have a patent, our own research shows.

An impressive 43pc of businesses we spoke to had been granted a patent but of them, 39pc have never applied for Patent Box tax relief.

On average, more than 5,600 patents were granted in the UK every year from 2012 to 2017, according to government figures. By contrast, the number of Patent Box claims over this period peaked at 1,160 in 2015/16 totalling £754.3m. This can only mean that the thousands of eligible firms not claiming are missing out on literally hundreds of millions of pounds.

If a company has registered any patents, it should immediately investigate how much of its income is generated from this product or service in order to cut its tax bill.

Innovate and grow

Innovation is of course not just about tax credits — they are simply an added bonus.

Developing new products, services and processes for which you own the intellectual property will help future proof your business against economic headwinds and give you a unique advantage over your rivals.

Your company’s creative ideas and intellectual property are what set you apart from the competition, which is why it is so important you foster and protect it.

Any small business which has developed a new product or process should look to protect it by registering a patent as quickly as possible.

Having properly protected patents and other intellectual property will also make a small business a much more attractive prospect for future investors, not to mention potential suitors looking to buy the company outright.

Market demands and customer needs and tastes are constantly changing so businesses must innovate to remain relevant. The most effective innovators will predict these changes, spot new opportunities and act accordingly. Stay ahead of the curve by investing in future success.

Mark Tighe, CEO of specialist tax consultancy  Catax


Mark Tighe

Mark Tighe is CEO of specialist tax consultancy Catax.