What is R&D tax relief? And why are so many businesses missing out on this valuable source of support from HMRC? Our guide to claiming covers some of the key points in the process.
R&D tax relief was created as an incentive to encourage companies to invest in innovation in the UK. Launched over 15 years ago, R&D now forms a key part of the government’s plans to boost UK enterprise in the run up to Brexit, with increased spending of an additional £2 billion a year by 2020 announced in last year’s autumn budget.
However, it has been estimated by market research house MCS Corporate that as many as 97% of eligible businesses still fail to claim the relief they are entitled to. For example, construction focused business consultant firm Invennt estimates that R&D in the construction industry could be worth over £1bn a year in R&D tax credits, yet in 2014-15 there were only 480 claims from construction businesses, totalling just £23 million.
What benefit does my company gain from R&D?
With R&D tax relief providing an additional deduction of 130% of R&D costs (a total deduction of 230%), this relief is definitely worth claiming. Profitable companies can significantly reduce taxable profits, whilst those companies currently making losses can surrender those losses in return for a cash repayment from HMRC.
If R&D is set to form such a crucial part of the government’s business investment over the next four years, companies across all sectors should make the most of the relief on offer, but must first get to grips with the R&D tax credit process.
Who can claim?
R&D tax credits are not limited to certain sectors, or certain sized businesses (although there is a separate R&D scheme with different benefits for larger corporates). Any company can claim, providing the work carried out meets the criteria defined by HMRC. Unfortunately, it is a common misconception that research and development activity is only carried out in technical and scientific fields, and as a result many businesses overlook this valuable relief.
What does HMRC define as ‘research and development’?
HMRC defines eligible research and development as activity that attempts to solve a problem through technological or scientific advancement.
Importantly, activity that is eligible for R&D tax credits doesn’t always need to result in a viable solution. Expenditure on activity that seeks a solution, but ultimately fails, can also form part of an R&D claim and the savings made can, among other things, be used to fund further projects.
Does your company carry out R&D?
The first step to claiming R&D is to find out whether your business carries out qualifying research and development, a step that many companies fail to consider, assuming that R&D does not apply to them.
It’s important to recognise that eligible activity can be found across various departments and disciplines within your business and what surprises many businesses is that eligible R&D isn’t always associated with a large scale development project: it can also be found in day to day activity e.g. changes to a manufacturer’s packaging process or waste recycling.
An R&D specialist will be able to help you identify what activity to include in your claim.
As an example, qualifying activity can include:
- Identifying and developing improvements in processes
- Developing a new product, or adapting an existing product
- Developing or adapting equipment to improve efficiency or sustainability
- Creating new environmentally friendly methods and sustainable technology
Calculating the amount of your R&D claim
Identifying the costs that are eligible to be included in your R&D claim can be difficult.
Some examples of eligible costs include:
- Staff costs: a proportionate amount of the employee’s salary based on their time spent on R&D. This should also include the cost of employer pension contributions and NIC
- Consumables: materials used in the research and development process. For example, timber used to test a prototype cutting tool or an electronic component part used to construct a prototype product. This category also includes water, fuel and power used in the R&D process
- A portion of sub-contracting costs: this needs to be carefully calculated, but can usually include 65% of the payments made to a third party
- Certain software costs
Working with an R&D specialist can help you to maximise your claim by correctly identifying your costs and avoiding unnecessary queries from HMRC.
Writing an R&D report
Although not mandatory, providing a written report along with a tax return including a R&D tax credit claim is arguably the most important part of the process. This report should explain the R&D project to HMRC, providing details of all costs and evidence that the R&D work undertaken meets the relevant criteria.
The key to creating a successful report is ensuring that the projects are explained in a way that HMRC assessors can understand. As R&D is often found in more technical areas of the business, this can be a difficult task: again, an R&D specialist will be able to communicate these ideas effectively.
Filing a successful claim
Many businesses are deterred from making a claim due to the intensive reporting procedure and potential for further investigation from HMRC. Smith & Williamson works with clients and sector-specific R&D consultants to reduce the impact on your senior team, allowing you to continue with business as usual.
The R&D tax credit team at Smith & Williamson can help you through each stage of the process. Typically this would involve:
- Assessing whether your business undertakes qualifying R&D;
- Identifying potential expenditure to be included in the claim