The Panama Papers have dominated the headlines for lifting the lid on how offshore companies have been used by the global elite to conceal the ownership and control of assets and property worth billions.As we hear about the avoidance schemes which have benefited everyone from world leaders and celebrities through law firm Mossack Fonseca, UK SME bosses should be turning their attention to a rather different tax controversy. This is the millions of pounds of unclaimed R&D tax credits that many SMEs are not taking advantage of. Intended to support the development of new products and services and perfectly aligned with the government’s long-term growth plans, this scheme has been available to UK companies for over 16 years. Yet many companies are not aware of it, let alone know how to claim it. Figures from HMRC show that approximately £800m is claimed by SMEs each year, mainly from manufacturing, science and technology firms. This is a fraction of what could have been claimed. Our estimate is that 30 per cent of UK SMEs which would be eligible for funding are still not aware of the reliefs. This means missing out on valuable funding – funding which could fuel further growth and provide more skilled jobs. So why is this hidden gem still going undiscovered? The biggest problem is that most SMEs don’t consider themselves as “innovative” or eligible for R&D credits, when actually a huge number are. The perception of R&D credits is that this kind of work is only carried out by scientists in white coats carrying smoking test tubes. In actual fact they go much wider than that. They can apply to many developments and improvements necessary for companies to stay competitive in their field. This means everything from food companies reducing sugar content to high street retailers developing footfall measuring techniques. Read more about R&D tax:
- The benefits of R&D tax relief versus grants
- How can you tell if your company will qualify for R&D tax relief?
- R&D tax credits: What you need to know
By presenting the right case to HMRC, the company was able to claim over £100,000 of tax savings to reinvest into further R&D activities. Another client, a civil engineering consultancy, had developed software analysis for flood forecasting and the related risk assessments. They were able to reclaim £50,000 which helped them hire two additional employees and boost their expansion. So why isn’t everyone reaping this harvest? Should there be more investment in raising awareness of these reliefs? Or is it the businesses which need to challenge accountants to work harder? Part of the problem is the complexity of tax legislation and the relevant guidance to first-time claimant companies. In fact, the very name of the tax relief is misleading. The government should really re-name it along the lines of the ‘Innovation and Efficiency tax relief’ to better reflect its purpose. That may sound cosmetic, but it would make a significant difference to how this tax relief is perceived and understood.
Yet the onus is also on SMEs to challenge their accountants or finance teams to identify what reliefs they may be eligible for. There is often a disconnect between a company’s finance team and the engineers and developers at the coal face. As a result it can be quite common that the finance people are not fully up to speed with the innovations and efficiencies being delivered by enterprising businesses, and miss out as a result, even though they might be aware of the tax relief available. Before we hear about another tax scandal from a celebrity or politician, bosses need to make sure they have their own house in order in terms of what reliefs they are claiming from HMRC. The time and effort could reveal the diamond in the rough. William Garvey is director of Leyton UK. R&D tax credits may be dull to some, and a mystery to others, but it’s arguably one of the UK’s best-kept secrets when it comes to alternative funding for small businesses.
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