R&D Tax Credits

R&D Tax Credits

R & D Tax Credits – The Process

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  • Initial meeting to establish if a claim is achievable and to quantify what might be possible. If appropriate, sign an agreement to proceed together with any confidentiality agreements
  • Hold a working meeting to establish the detailed factors of any projects that have had some form of research or development aspect
  • We have specialists who have the experience to ensure the full costs are identified
  • Liaising with the company to obtain the relevant data necessary to form a claim
  • Prepare a claim and supporting narrative in a format suitable to HMRC
  • Establish with your accountants the  revised tax computations and revised CT600
  • Submit the finalised claim to the specialist section of HMRC covering your area
  • Deal with any HMRC queries

We work on a NO WIN NO FEE basis 

R&D Tax Credits 

What is qualifying R&D? 

Qualifying R&D activity for the purposes of the Tax Reliefs may be undertaken in almost any industry. However, it is often unclear to businesses whether an activity is R&D and this is where we can provide a great deal of assistance both in helping you determine whether you are undertaking R&D how HMRC interpret it. The average claim value is £46K.

The UK Government’s definition of R&D for tax purposes is activity which occurs ‘when a project seeks to achieve an advance in science or technology through the resolution of scientific or technological uncertainty’.

Although this definition often makes people think of scientists working in laboratories and wearing white coats, the scope of R&D Tax Relief is broader than this.

If you can answer ‘yes’ to any of the following questions then R&D Relief may apply to you and your company:

  1. Have you developed (or tried to develop) any new products, processes or systems
  2. Have you made any improvements to existing products, processes or systems
  3. Have you undertaken any other system, product or process development
  4. Did you encounter any uncertainty in attempting to achieve any of the above – i.e. perhaps you knew what you want to achieve but needed to consider and analyse different solution options before arriving at the most suitable.

Claim deadline

Companies have 2 years from the end of an accounting period in which to make a claim for R&D Tax Relief. 

SME Relief

  • Companies claim a 230% tax deduction for qualifying R&D expenditure
  • Loss making companies are able to claim a cash back credit in exchange for surrendering losses.
  • The value of this cash credit is 33% of the qualifying expenditure. For every £100,000 spent on qualifying R&D, £33,000 is received in cash from HMRC.
  • Profit making companies obtain a benefit by gaining a significant reduction in their tax bill. This results in a cash benefit equalling 26% of the qualifying expenditure. For every £100,000 of qualifying expenditure, a cash benefit of £26,000 is received by way of a reduction in your corporation tax liability.

SME Definition

The SME R&D Tax Relief qualifies as a Notified State Aid by the European Union and as such the definition of SME is provided by the EU Recommendation 2003/361/EC.

A company will qualify as a SME if it is an independent enterprise and:

  • it has < 500 employees; and either
  • Annual Turnover < €100m or
  • Balance Sheet assets of < €86m

It can be complex to determine whether a company is an SME as the wider group and investors also need to be considered. If the answer is not obvious, we can help you determine whether your business falls within this definition an therefore whether SME Relief will apply to you.

What is qualifying expenditure for SMEs?

  • Staffing costs – including pay, employers’ Class 1 NICs, payments to pension funds and reimbursed expenses. It does not include benefits in kind or Class 1A, 1B NIC on benefits.
  • Consumable or transformable materials – including the cost of materials and equipment used up in the R&D activity. It also includes spend on power, fuel, water and software used for R&D. It does not include rent, rates, interest on lease payments and capital items.
  • Externally provided workers – in certain circumstances, payments to agencies or group employment companies may qualify.
  • Subcontracted R&D – payments for work subcontracted to a third party may qualify.
  • Any software used for R&D. It does not include rent, rates, interest on lease payments and capital items.
  • Externally provided workers – in certain circumstances, payments to agencies or group employment companies may qualify.
  • Payments to qualifying bodies – payments to specific bodies (e.g. universities, individuals) may qualify.

Over 20,000  claims for R & D Tax Credits.

R&D Tax Credits were introduced in 2000 to stimulate and reward greater UK innovation and global competitiveness. This initiative is going from strength to strength, with year on year increases in uptake.

According to HMRC’s official statistics for 2013-14:

  • Successful claims rose by £380m on the previous year
  • the number of SME’s  claims rose 23% to 20,000

Together, this means that the total amount claimed since the scheme was introduced now stands at £11.4B .

The whole of UK PLC seems to be benefiting to one extent or another. The statistics for 2013-14 reveal that every region showed an increase in uptake, with London, the South East and East of England accounting for nearly half (46%) of all claims. 

Manufacturing remained the top performing industry sector (31% of all claims), closely followed by Information & Communication (26%) and Professional, Scientific & Technical (19%). The remaining 24% is made up companies in everything from the Arts, Entertainment & Recreation to Water, Sewerage & Waste, proving that you don’t need to be operating in the more obviously eligible sectors to benefit.

We’re also getting the message across that the programme applies not only to enterprises engaged in blue-sky research, but also to every company which improves on systems and procedures, or discovers new ways of processing things.   This means that for every £100 of qualifying expenditure, SME’s can reduce their corporation tax liability by a full £230.”

If you are a company where you have people and costs associated with project activities aimed at advancing what you do, then you could be eligible for R&D tax credits.

BACKGROUND
Research and Development Tax Credits were launched back in 2000 and the scheme is administered by HMRC. The principle is very straightforward and is a win–win scenario for both the UK economy and the eligible companies. If the government can make it easier through tax relief for companies to invest in innovation, then it is more likely that these companies will undertake innovative projects to benefit their business growth and contribute to the UK’s future success and standing.

The good news is that since its launch the benefits of the scheme have increased significantly, so there has never been a better time to claim.

WHAT ARE THE BENEFITS?
R&D Tax Relief applies to both profit making companies paying Corporation Tax and also loss-making companies who are not, both are able to claim for eligible activities. Relief can be received as lowered corporation tax or in some cases as a payable cash credit. The calculations are many and varied so the simplest way to help you understand what you might get in the form of SME tax relief (dependent on a number of contributing factors of course) is around 25p for every £1 you have spent on eligible activities.

CAN YOU CLAIM?
This is where HMRC’s terminology can create confusion and probably why so many companies failed to recognise that they were eligible for tax relief, even to this day. In the words of HMRC it was created to benefit companies striving to achieve technical and scientific advances through projects that extend the current industry baseline, and where uncertainty in the outcome exists and the methods used to achieve success are not readily deducible. See what we mean? It’s not particularly clear what’s eligible and what’s not.

The simplest way to finding out whether you may be eligible to claim is asking yourself some questions like: Have we developed new tools, products or services using technology? Have we tried to improve our existing products through technical changes? At the start of a project, did we ever think ‘I’m not sure of the best way to do this’? 

HOW CAN YOU CLAIM?
The reality is that there are a number of ways that you can claim for R&D tax relief. You can claim yourself, through your accountant or through a specialist service provider. However, it’s important to understand the implications of your choice and the consequences that can be generated.

The accountant route is often assumed to be the logical choice because it is a tax process. However, estimations show that overall accountants are only claiming for approximately 10% of the potential eligible relief for their clients due to understated claims or claims not being made. The reality is that, if the claim is assessed properly the activity is 80% technically focused. There are some things that accountants are best equipped to manage on behalf of their clients and logically these are all things purely accounting based. 

The great majority of accountants are not technical and will not understand what you do, how you do it, the context of your projects and known industry alternatives and therefore generally submit conservative claims that are largely under the legitimate entitlement for the client.

PARTNERSHIP IS THE WAY TO GO
The key is to identify as much eligible expenditure as you can; The more you identify, the greater the value of the relief you’ll receive from HMRC. So the ideal partnership to deliver the best results for any client is the combination of a specialist technical R&D tax relief advisory firm who speaks both your language and HMRC’s; and your accountant. In collaboration they can manage the assessment, preparation and submission on your behalf, ensuring you receive the biggest return for the least possible effort.

Definition of R&D

What constitutes R&D in your eyes may be very different from HMRC’s interpretation, leading to at best, wasted time and at worst, an HMRC investigation.

You’ve heard there’s substantial money to be reclaimed using the UK Government’s R&D tax credit scheme. But what constitutes R&D in your eyes may be very different from HMRC’s interpretation, leading to at best, wasted time and at worst, an HMRC investigation. Let’s clear up the confusion and see if we can’t win you a pot of money!

R&D to you and me
To most people, research and development is one way of stimulating future growth by developing new products or processes to improve and expand a company’s operations. 

Sounds simple enough and, if you’ll pardon the pun, the R&D shouldn’t be too taxing to identify.

HMRC’s definition of R&D for tax purposes
According to HMRC, R&D for tax purposes is a project that “seeks to achieve an advance in science or technology [through] the resolution of scientific or technological uncertainty”. Even if it isn’t successful, R&D is still deemed to have taken place. 

So basically, in HMRC’s world, you’re undertaking R&D when you’re:

  1. overcoming technological uncertainties aimed at
  2. achieving an advance in technology,

That’s a tad less simple and nowhere near as easy to identify – at least not without specialist knowledge.

Got it! Or have you?
Okay, so you’ve studied HMRC’s R&D tax relief guidelines (all 500-plus pages of them), and you’ve come to the following conclusion. 

You’re probably NOT doing R&D because: of popular misconceptions:

  1. YOU believe that all you’re actually doing is your day-to-day business, and from what you’ve read, qualifying R&D needs to be revolutionary & radical.
  2. YOU believe qualifying R&D is restricted to hi-tech, pharmaceutical companies with research labs full of people in white coats. WRONG AGAIN!!

This is where the R&D message gets lost in translation and companies end up missing out on valuable tax relief (or even hard cash) that they could be entitled to. 

And the good news is…

For the purposes of tax relief, qualifying R&D activity can:

  • be undertaken in almost any industry; and
  • include trying to make something cheaper, faster, smaller, larger or longer, etc.

Some examples:

  • creating software that automates a manual task is not R&D; but
  • creating new encryption or security techniques that don’t follow established methodologies IS R&D.

A case study to illustrate some key points.

Another key consideration is that HMRC’s guidelines define R&D for tax purposes as “a project that seeks to achieve an advance in science or technology”. That advance needs to be made over the whole field of science, not just by one company for its own benefit, as happened here.

Your partner in R&D tax credits
All of which goes to show why it pays to use a specialist when making R&D tax credit claims – someone who does this day in day out, who keeps abreast of all the latest changes in legislation (and HMRC’s interpretation of it) and who truly understands where a project is advancing science as a whole, where it’s solving uncertainties or unknowns and where readily deducible knowledge just isn’t enough. 

Get it right and you have the basis of a potentially significant claim. Get it wrong, as a lot of life sciences companies do, and you could end up with a swarm of HMRC inspectors buzzing around your head. 

The R&D tax credit scheme encourages innovation, by providing a safety net to allow companies to do some risk-taking.

If only there was a safety net for such a risky business….oh, wait, there is!  R&D tax credits.  

The R&D tax credit scheme was introduced in 2000 to encourage innovation, by providing a safety net to allow companies to do some risk taking.  The scheme works by enhancing all money spent on R&D in a financial year by 130% (as of April 2015) for SMEs and 30% for Large Companies.  This enhanced expenditure is deducted from taxable profits, leading to an often substantial reduction in corporation tax.  Loss making companies are even eligible for a cash credit.  

This means that a huge amount of the risk is taken out of innovation, because even in the event of your project failing, you can recoup some of the costs that went into it.  Like a safety net under a tightrope, R&D tax credits are a nice cushion that can encourage small companies to take the first step.  

R&D Tax credit  Myths.

We love a good myth, particularly mythical creatures, and especially unicorns! The kind of myths we don’t like though, are those about R&D tax credits, that frighten companies into believing that R&D tax credits aren’t for them. 

1. You’re not eligible for R&D tax credits unless you wear a white coat and work in a laboratory.

Any limited company from any sector can be eligible for R&D tax .

As long as you are working towards an advance in your field and facing uncertainty in how to do it you could very well be doing R&D.

2. You can only claim for successful projects.

You can claim R&D tax credits for any eligible R&D project whether there was a successful outcome or not. In fact failure can be a good sign of eligibility – what can be more uncertain than a seemingly impossible project?

3. You can only claim for your current financial year.

You can make a retrospective claim up to 2 years from your current financial year end, which means companies new to the scheme can still go back and claim for older projects rather than missing out.

4. A grant means I cannot claim. 

While it is true that some grants can complicate an R&D tax relief claim, it is still possible to make a claim no matter what other funding you have received.

5. You can’t claim if you are subcontracted to do work by another company.

Subcontracting can be a tricky situation in an R&D tax credit claim, but it doesn’t necessarily mean you can’t claim. You need to be very sure about your contractual situation, the work you are contracted to do and who is bearing the brunt of the cost, as all these can have an effect on the eligibility of subcontracted work.

6. Claiming R&D tax credits is difficult.

Ok, sort of a myth, it’s a complicated process that requires knowledge of your technology (easy for you!) but also an in depth knowledge of HMRC’s R&D tax credit legislation (not so easy!). But you can cut out the difficult part by enlisting the help of an R&D tax credit expert who can take on the hard work and complications for you.

ELIGIBILITY 

  1. NEW  PRODUCT  DEVELOPMENT  – Do you develop new or regularly change the way you make your products?
  2. Product ImprovementDo you undertake activities that seek to improve products, materials, processes, services or devices through technological or scientific changes?
  3. SOFTWAREDo you develop software, IT solutions or products?
  4. Technical ChallengesHave you faced technical product or process challenges that you have tried to resolve?
  5. ManufacturingHave you sought to develop or improve your manufacturing or engineering processes?
  6. EfficiencyHave you improved or sought to improve manufacturing, process or service efficiency or costs?
  7. UncertaintyWhen starting a project have you ever been unsure of how to go about it or uncertain of success?
  8. Testing & Prototypes Do you undertake sampling, testing, trials or develop protoypes or tools?
  9. Services Do you undertake product or process development or improvement services at your own risk?