Most finance directors are aware of research and development tax relief, but may not know exactly what it is or who qualifies for it. There can be a misconception that it’s only applicable to the kind of research that goes on in a lab by scientists in white coats. However, there is a far wider spectrum of qualifying activity.
Another misconception is that the relief is just for big business, when in fact SMEs may qualify. There are two different R&D tax relief schemes which offer varying levels of benefits according to the size of business:
Small businesses – SMEs must have less than 500 FTE staff and revenue of less than €100m or balance sheet assets of less than €86m. The rate of R&D tax relief can be up to 230% on qualifying R&D costs. Companies can potentially claim between 24.7% to 33.35% of eligible expenditure depending on their circumstances.
Large businesses – Research and Development Expenditure Credit (RDEC) scheme applies to companies with over 500 FTE staff or with revenue greater than €100m and balance sheet assets greater than €86m. The R&D tax relief for large companies is currently 11% of qualifying R&D expenditure (before tax).
To qualify, irrespective of size, businesses must also be a limited UK company and liable for Corporation Tax. The company may even be eligible if it is making a loss, although the amount that can be claimed varies depending on the health of the balance sheet. Claims also can be made dating back to within an organisation’s last two financial years.
The importance of R&D
R&D tax relief is important to the economy as it allows the government to support companies that aim to lead the field by developing new products and services, to be innovative and provide solutions to problems.
This, in turn, helps British companies to be more competitive in the global market place. British industry has long had a reputation for innovation and with Brexit looming, it’s more important than ever to maintain a competitive edge.
There were over 22,000 R&D tax relief claims made in 2015. Although the amount claimed varies according to the size of the company and the nature and range of activity carried out, the reliefs available are always worthwhile. It can fund further research, additional staff or new equipment – or simply be fed back into the company to aid profitability.
What kind of projects qualify?
According to HMRC’s criteria, a company may be eligible if a project seeks 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 company must be able to show that it is involved in activity to develop technological solutions that are not currently available, or where the knowledge to do so is not publicly available.
As far as HMRC is concerned, the difference between a technological uncertainty and a technological unknown can be the difference between an eligible and ineligible claim. R&D only begins when technological uncertainties arise; technological unknowns on their own are not eligible R&D.
To put it simply, unknowns can be solved through brief discussions between competent professionals; uncertainties arise when knowledge of whether something is technologically feasible, or how to achieve it, is not available or deducible by a competent professional.
Process improvement is an area that has recently come under much scrutiny from HMRC, and as a result, companies that have previously completed a successful R&D tax relief claim may find themselves struggling with future claims.
Whilst advancements in a company’s processes can still be considered as eligible R&D, they must now be leading to a strong advance in science and technology, and not simply increasing profits.
If a project is eligible, there are a range of costs that can be claimed for. These include:
- Staff salaries
- Subcontractor costs
- Materials and consumables
- Software costs
The claims process
Making a successful R&D claim often requires a combination of financial and technical/scientific expertise. Accountants and FDs might find it relatively simple to put the figures together, but gathering the required technical details and presenting that information in the right way to meet HMRC’s criteria is more challenging.
The R&D tax relief legislation guidelines are a good starting point, however they are long, complicated and subject to regular refinements, making deciphering them a time-consuming process.
Some companies make the mistake of providing marketing information (emphasising the quality of their product), instead of focusing on the problems encountered during product development.
HMRC requires that the technical reports for R&D tax relief claims be presented in very simple terms, which can be difficult when explaining the hugely technical details of a company’s project. The key to the process is having an understanding of the technology – not just finance.
The marriage of science and numbers
When working on a claim, it’s important to provide answers in a language that HMRC understands and that meets their criteria. This can be difficult to get right so it’s important to have a grasp of the finances and the technology – a marriage between the two areas, drawing on different sets of skills and knowledge.
The best way is to create the necessary report is working in conjunction with key staff, with a comprehensive financial schedule that allows HMRC to see exactly how the total claimed for is broken down and justified.
Making the technical people in your organisation aware of the specifics of HMRC’s guidelines can help them to provide the best possible information to support their claim. This can also help to reveal potentially eligible projects that might not otherwise have been considered for R&D tax relief.
R&D tax relief isn’t money for nothing – companies have earned it and so they should be doing all they can to find out if they are eligible and claiming what they are entitled to.
Making a successful claim can be a complex process but there is help available. It is importsnt to remember that R&D isn’t just important to one company or market – it’s important to our whole economy.
Garry Keith is a business development manager for R&D tax relief specialists Jumpstart