R&D tax credits are a valuable incentive for UK companies and following the budget this year, from April 1 2015, businesses have been able to claim up to £33.60 for every £100 spent on qualifying R&D – yet industry statistics have found only 5% had ever claimed this form of tax relief.
Not only that, several recent reports have indicated that the UK is falling seriously behind other European countries when it comes to their spend on R&D, particularly those in Scandinavia such as Finland and Denmark. This is nothing new of course; the gap was there in 2005, and a decade before that too. The trouble is, it’s growing, and the R&D tax relief scheme from the government is an attempt to get to grips with that.
Despite a fall in Corporation Tax announced in the Emergency Budget, this is still a hugely valuable endeavour for businesses of any size that are engaging in R&D, advises tax credits experts Innovation Plus. Profit-making businesses can enjoy a reduction of 26% on qualifying expenditure, while those making a loss can reclaim a cash payment worth up to 33.35% – certainly not figures to be sniffed at! Yet despite this, many SMEs are believed to be either under-claiming, or simply not claiming anything at all, with HMRC estimating that of companies operating in the tech sphere alone, fewer than 45% are getting back everything they’re entitled to. Other industries, such as finance, health, construction and real estate, also show low take-up.
SMEs can increase their own value by investing more in R&D, and also of course they have the potential to seriously benefit the wider UK economy. But for British firms to compete on an equal footing in Europe, and worldwide, they need to maintain their reputation for innovation, and using every available financial instrument will help to give confidence.
So what is the issue with tax credits? Why aren’t more firms claiming them when they could?
One cause may be that many businesses simply aren’t aware of what constitutes eligible R&D for tax purposes, or of the potential for claiming for associated costs across an organisation.
To qualify for tax relief, an R&D project must be one where it will result in an increase to knowledge or capability in a field of science or technology. At its simplest, an eligible project involves coming up with new or improved by solving a technical problem, such as whether a smartphone will still be able to take a call after being submerged in water. Also worth pointing out is that because an R&D project will often involve several other areas of a business, not just the R&D department but finance, marketing, all the way up to the CEO, the time involved by every staff member can potentially be claimed for, providing they are carrying out eligible activities such as testing
So what should you be doing if you think your business would qualify for R&D tax credits? Firstly, if you’re not certain, then you ought to seek the advice of an expert that can tell you whether a claim is worth pursuing or not. Many accountants are unfortunately, if understandably, confused by R&D tax credits as by its very nature research and development is a technology, rather than financial affair. If it’s valid R&D for tax purposes, then it’s crucial to remember that claims must be made within 12 months of the filing date for the accounting period in which the costs were incurred. Any later claims will not be honoured.
Your business should keep a regular track of R&D expenditure and make a point of retaining as much documentation as possible, to demonstrate project scope, aims and results.
You want to give HMRC as much information as it needs, and as little scope as possible to challenge or reduce your claim.
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