Introduced in 2000, the Research and Development (R&D) tax credit scheme is one of the best tax-delivered incentives in the UK. It is designed to stimulate innovative activity in manufacturing and technology to maintain the UK’s world lead in many sectors.
The scheme is massively under-utilised. Since 2000, around 11,700 claims have been processed, at a value of £1.2bn each year in R&D tax relief from HMRC. However, many more thousands of companies aren’t claiming; approximately £10bn has been unclaimed since introduction.
The benefits of the programme include increased cashflow, which is especially important to small, developing companies. It also encourages development of a corporate philosophy that embraces innovation and improvement.
From April 2012, companies have been able to deduct up to 225 per cent of qualifying expenditure when calculating their profit for tax purposes. Importantly, you can claim R&D tax relief on expenditure that’s up to three years old. The precise size of the tax credit will depend on the size of your company, its tax rate and how many of your activities are eligible.
A common misconception is that the scheme is just for companies with R&D departments and men in white coats. The fact is that any company that spends money trying to improve a product or service through a technological advance, using qualified staff and appropriate project controls, and where there’s doubt about the project’s success, is likely to be eligible.
Eligibility is judged on three criteria: project content, advancement, and uncertainty. The project content must be technical i.e. science- or technology-based. The project must also contribute to technological advancement within its field. It doesn’t have to be a large advance; it just has to be shown to be defined and above the industry standard. Finally, and possibly most importantly, the project must possess uncertainty that prevents a guarantee of success.
The quickest way to determine eligibility is to speak to a specialist R&D tax credit consultant rather than an accountant or tax adviser. Accountants typically point the client in the direction of the scheme rulebook. When the client has read the rules, collected expenditure and justified a claim, the accountant may then be able to advise how much can be expected back.
The disadvantage of this, over and above the time involved, is that many managing and technical directors miss projects that are less obviously eligible, or inadvertently over-claim for things that they shouldn’t. Because other technical staff tend to be left in the dark about the programme’s intentions and criteria, accountancy-only claims are technically weak and easily challenged or overturned by HMRC.
Using a specialist, qualifying companies can typically look forward to recovering a tax credit within 18 months. First, the R&D tax credit specialist will identify eligible projects for R&D submission, dealing directly with the staff involved in development. After refining its report in conjunction with key staff, the specialist will create a comprehensive financial schedule that allows HMRC to see exactly how the total claimed is broken down and justified.
After guiding the process through HMRC, dealing with any questions that may arise along the way, the specialist then secures, almost without fail, a tax benefit for the company in the form of a payable cash credit, a tax rebate, or an enhanced deduction that can be set against future profits.
All companies, large and small, can claim if they undertake qualifying work. SMEs can benefit even if they are loss making – they can surrender the R&D tax losses for cash. This is of considerable assistance to start-ups in need of cash to fund their R&D.
It means that innovative, risk-taking small companies are given a boost that may mean the difference between failure and success.
Brian Williamson is MD of R&D tax credit specialists Jumpstart.
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