By making a relatively straightforward R&D claim an innovative company can either reduce its tax bill, or make a claim to receive cash from HMRC. However, many businesses that are eligible for tax credits are not taking advantage of these generous reliefs.
What types of business can claim for R&D?
There is a general misconception that R&D claims only apply to technology and research focused companies, such as the large pharmaceuticals companies. Surprisingly, any business which is innovative could qualify.
Claims are usually made by companies that either create a new product range or make significant, or appreciable, improvements to existing products. However, they can also be made by companies developing new or improved processes, typically around manufacturing, or where software has been developed specifically to create business efficiencies or streamline business processes.
Organisations that do not appear to fit the typical business type may also be able to claim – including retailers, wholesalers, charities, healthcare organisations, renewable energy providers, food manufacturers and many more.
What are R&D tax incentives?
R&D tax credits were first introduced into UK tax legislation in the Finance Act 2000 as one of a number of tax measures to promote investment in innovation and stimulate economic growth in the UK. There are two types of R&D scheme with differing benefits – the SME scheme and the less generous large company scheme, which also applies to certain types of SMEs, such as subcontractors.
SMEs can currently claim 130% additional tax relief over and above the tax relief available for R&D costs. In certain circumstances, if the company makes a trading loss, it can surrender the loss that relates to the R&D relief for cash. The cash payment is currently equivalent of £33.35 for every £100 of R&D spend.
Large companies can currently claim an additional 30% additional tax relief over and above the tax relief available for R&D costs. This can be used to reduce a company’s taxable profits or enhance its tax losses.
Alternatively a large company can claim under the Above The Line (ATL) tax credit scheme. The ATL tax credit can be offset against the company’s corporation and also other tax liabilities. In the right circumstances, loss making companies can reclaim the tax ATL credit at up to £8.80 for every £100 of R&D spend.
As a rough guide, if a company can answer ‘yes’ to both of these questions, it is likely that it is undertaking R&D activities:
Has it sought to improve its products or processes through an advance in knowledge or capabilities in the field of science or technology?
Did it require scientific or technological uncertainties to be overcome to achieve the improvement?
Making a claim
There is a great deal of uncertainty about how to make a valid R&D claim. The perceived complexity could be another reason why many businesses are not taking full advantage.
Unhelpfully, neither the tax legislation, nor the HMRC guidance on this specifies the mechanism of how to make a claim or the information that needs to be included in the R&D claim.
In addition, many of the currently available corporation tax software packages only require two pieces of data to be input: the total quantum of qualifying R&D expenditure and whether the claim is being made under the SME scheme or the large company scheme.
The suggested approach is to prepare and send to HMRC a report that substantiates the R&D enhanced tax deduction in the corporation tax computations. This should set out the nature of the R&D activities and provide a detailed breakdown of the total of the qualifying R&D expenditure.
The starting point is to carry out a detailed review of the business activities in order to identify any R&D projects. This should be documented, together with an explanation of the innovative nature of the projects and the technological uncertainties that had to be overcome.
It is then relatively straightforward to identify the people working on the R&D projects and calculate the proportion of their associated salary and subcontractor costs that relate to the R&D activities. Separate from this, any expenditure on consumables, software, prototype costs, as well as any heat, light or power costs attributable to each R&D project, should be identified and included in the report.
It has been widely publicised that UK businesses lag behind the rest of the world in regards to innovation. Making an R&D claim for innovating business products or processes could be a great way to boost productivity and receive a cash boost from HMRC.
Statistics indicate that last year only 20,000 companies made an R&D claim, so it is likely that many businesses are missing out on these considerable benefits.