R&D Tax Credit statistics recently unveiled by HMRC and accumulated by the Office for National Statistics show that during previous financial years that almost 10,000 SMEs in the UK successfully made R&D Tax Credit Claims.
That percentage stands at a 49% increase on the number of SMEs who made R&D tax credit claims made on average during previous financial years, but there remain a portion of ventures that are qualified to make a claim but haven’t yet done so. In 2016, it was estimated that there were over 5 million businesses in the UK, of which 99% were SMEs and 96%, around 4.6 million, were micro businesses, employing 0-9 people. Although it is difficult to approximate how many SMEs are eligible to make a R&D Tax Credit claim, as the number of SME businesses are increasing year on year, there remain many thousands of entitled businesses not making use of tax incentives for their innovations.
Since the R&D tax credits scheme was introduced in 2000-2001, almost 85,000 claims have been made, with over £8 billion of relief claimed. The scheme remains the largest motivation provided by the government for investment into research and development.
Of the SMEs who successfully made R&D tax credit claims, 2,490 (38%) were from the manufacturing sector and 2,930 (44%) from the business services industry. It is somewhat difficult to further scrutinize the business services data as the figures are grouped by SIC codes, but it is likely that software development claims would feature highly in this sector. These two industries alone account for 82% of all SME R&D tax credit claims; this figure is almost identical to the industry breakdown for the large company scheme. Although these two industry sectors stand out from the others in terms of R&D activity, R&D tax relief is available to companies in all industries doing innovative work.
If your company is involved in any of the following areas, you could qualify for R&D tax credits:
- Designing and producing new products;
- Improving the way you make products;
- Adding value to your products and manufacturing processes;
- Development projects that have not gone into production;
- Making environmental improvements;
- Developing software.
Your company or organisation can only claim for R&D tax relief if the R&D project sought to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty. The project cannot seek only to advance the company’s own state of knowledge or capability. Further details can be found in HMRC’s R&D tax relief guidance.
For small businesses, the best approach to making an R&D tax credits claim would be to work with an effective R&D consultancy firm providing targeted technical expertise and delivering an exceptional level of service. The London and East-Midlands based consultancy firm Myriad Associates has recently developed a bespoke self-service portal specifically designed for SMEs with 50 or fewer employees. Tax Cloud is a self-service online portal that offers small businesses a guided, innovative, online tool to help them through the R&D tax relief claim process.
The portal’s fee is just 3.5% of your eligible qualifying R&D expenditure. This is equivalent to 10.4% of the corporation tax savings for loss making businesses, and 13.5% of the corporation tax savings for profit making businesses. There is no upfront fee; users only pay Tax Cloud after their claim has been processed by HMRC.
Misconceptions about R&D tax relief
There are several misconceptions about claiming R&D tax credits that prevent legitimate claims across the software development industry. There’s no simple checklist to determine what projects qualify for R&D tax relief, but in general, the business must be undertaking development activities that seek to achieve an advancement in technology, which many SMEs are doing in their day-to-day work. If your business faced technological uncertainties at the start of the project, and did not know whether a technological goal was achievable, that’s a good indication that qualifying R&D activities were taking place.
Smaller companies may feel overwhelmed by the HMRC definition of R&D, and may not have the internal resources available to do further research on claiming R&D tax credits. However, HMRC publishes a manual on R&D tax relief and has provided a simple guide on R&D tax relief for small and medium-sized companies. There are also specialist HMRC units able to help with your claim, and you can find further assistance by contacting a specialist R&D tax credit advisor.
The main areas of costs that can be claimed are:
- Staff costs (gross pay, employer’s National Insurance contributions, and employer’s pension contributions)
- Agency workers/externally provided workers
- Sub-contractors/freelance workers
- Software licence costs
- Consumable items (materials or equipment used or transformed by the R&D process)
It is not uncommon for businesses who do submit R&D tax credit claims to do so for only some of their qualifying projects. In addition to being able to claim for projects that are obviously breaking new ground, you can also claim R&D tax credits for projects aimed at making an appreciable improvement to existing technologies.
Your R&D project team may include the R&D manager, a lead developer, engineers, project coordinators, quality control and testing specialists, cost accountants, admin support staff, and members of the senior management team. You can claim for each of these roles in proportion to the amount of time they spent on your projects.
It is not uncommon for claims to miss including freelance contractors that are actively involved with the project. You can also claim for overseas contractors – this includes subsidiary costs, as long as those costs are included in your profit and loss account.
It is best to take a team approach when you prepare your R&D tax credit claim. This helps ensure that you capture all eligible projects, costs, and people that have been involved in the qualifying R&D activities. The best person to lead the R&D tax claim process is often the technical lead, rather than a member of the finance team. This is because the first and most important step in making your claim is identifying all your eligible projects.
Although there has been a continuing increase in the number and value of R&D tax credit claims, there are still thousands of companies – especially SMEs– that aren’t claiming what they’re entitled to. The opportunities for SMEs in the UK to maximize their R&D tax credits benefits are constantly increasing and platforms such as Tax Cloud provide even more cost-effective avenues to consistently build on their development.