While the majority of business owners have heard of Research and Development (R&D), most think it’s the exclusive preserve of pharma companies and other blue chips doing things that everyday businesses like yours and mine don’t do. This is a myth that needs to be shattered.
The reality is that SMEs accounted for more than 80% of all UK R&D claims in the 2013-14 tax year. And they’re doing more of it all the time. In 2014, total expenditure on R&D carried out by UK business rose by 6% to a staggering £19.9 billion.
Unfortunately, according to HMRC itself, less than 1% of UK companies eligible for R&D tax credits ever make a claim because of their complexity and the constantly changing legislation in this area of tax.
Importantly, R&D tax credits are available to businesses in every sector, not just those undertaking scientific research. What matters is not the size of a company or the sector it’s in but that the company in question is developing new products, services or systems – or materially improving existing ones. If it is, then R&D tax credits are available.
Take an example – a leading micro-brewery in the North West, Lancaster Brewery, recently received a sizeable cash sum back from HMRC as a result of R&D activity it had carried out to find a distinct flavour for a new pint.
The R&D costs involved in finding this unique new flavour amounted to around £98,500. After sending all the relevant information to HMRC for assessment, Lancaster Brewery’s Finance Director was told he would be receiving just under £25,000 of tax relief (roughly 25% of the total R&D costs mentioned above) for the 2014 and 2015 tax years combined. Imagine that – the government paying you to taste beer!
Similarly, an online supplier of veterinary products based in Luton spent £57,000 in two years on R&D related expenditure in order to design and develop a sophisticated software system that allowed for more advanced stock control management, mapping of product listings, pricing and marketing.
Within a few months of approaching RD Tax Solutions, the owner received just over £14,000 of tax relief (again, approximately 25% of the total R&D costs mentioned above) for the 2013 and 2014 tax years combined.
And a third example is an education company. It recently completed a successful R&D claim on a proprietary e-learning platform it created. The platform enabled users to keep track of their progress throughout their courses, and complete training exercises and online assessments in a new way, making it eligible for R&D relief.
The R&D costs involved in creating this platform amounted to just over £200,000. After submitting a breakdown of the costs involved to HRMC, the client was informed that it would be receiving a rebate of just over £40,000.
Hardly pocket change
All three companies mentioned above were in the same situation before they approached RD Tax Solutions – totally oblivious to the fact that the R&D activity they had undertaken could entitle them to an unexpected pay out from HMRC.
And as the numbers reveal, we are not talking pocket change. In fact, at RD Tax Solutions, our average claim is in excess of £42,000. In some cases, the tax relief available to the claimant can extend to approximately 30% of the initial investment undertaken by a business in research and development.
Also, it’s important to point out that the R&D activity does not need to be successful. For example, if a company undertook research to create a new stock control system but the project was unsuccessful, the business owner could still include this activity in their claim.
Don’t delay on a claim!
Finally, it’s worth saying that most R&D tax relief firms, including ourselves, operate on a ‘No Win, No Fee’ basis, and only charge a fee once the tax benefit has been identified. This means that there is no risk and no up-front cost for the business.
Oh and it’s vital that any company that thinks it might be eligible of claiming R&D tax relief acts quickly. The reason for this is that that R&D tax claims can only go back two tax years.
Break-out box: Right not privilege
R&D tax credits are a right and not a privilege. If businesses have incurred expenditure or costs developing new products, services or systems, then they are eligible for a tax benefit.
R&D tax credits are essentially the government’s way of rewarding innovative companies for developing new, or appreciably improving existing, products, processes, systems and materials — activities that are intended to increase the UK’s wealth creation capacity.
Importantly, R&D tax benefits only apply to those businesses that are liable for corporation tax. They can help to reduce a corporation tax bill or be claimed as a cash sum as a reimbursement from the HMRC due to an overpayment of tax.
Types of qualifying R&D expenditure include the cost of staff used to carry out the R&D work, any supporting software, travel costs, utility bills such as power and water, certain payments to subcontractors, and any fees incurred in creating a prototype.
By Mark Tighe, managing director, research and development tax reclaim specialists, RD Tax Solutions