R&D Tax Credits: UK companies are missing out on extra tax relief
Research and development (R&D) tax relief was introduced by the government in the year 2000 to encourage UK company investment into innovative projects. Serving as a lucrative tax incentive, the scheme is open to any UK company that’s registered for Corporation Tax, regardless of size or sector. However, there’s still a widely held and outdated assumption that R&D only happens in science labs or ‘techie companies’ which simply isn’t the case.
In order to claim R&D Tax Credits, an R&D project simply has to have attempted to resolve a specific “scientific or technological uncertainty”. For many companies this means developing a new product, service or process, or improving an existing one.
The project itself doesn’t even have to have been successful, as long as some kind of technical or scientific research was undertaken. As much as 33% of eligible R&D costs can be claimed back via R&D tax relief, either against a company’s Corporation Tax bill or as a cash lump sum. So even for the smallest projects, we’re not talking small change here.
Sounds great. But why are so many small companies still not claiming the R&D tax relief they’re entitled to?
Latest statistics published by HMRC show that a whopping £7.4bn was claimed in UK R&D tax relief for the year ending March 2020. Of that, around £4.4bn was claimed by SMEs. However, it’s likely that many are still missing the boat. This is a massive shame, as with average claims sitting at around £55,000 it’s a huge amount of to miss out on.
Common issues include:
1. Believing R&D tax relief is too good to be true
Entrepreneurs, start-ups and small businesses are all about hard work, and ‘handouts’ from the government aren’t expected. But R&D tax relief isn’t a handout; it’s a chance to claim back money you’ve already earned. It’s a perfectly legal-decent-and-honest way of the government rewarding company innovation.
Remember too that the government isn’t just doing this out of the goodness of its heart (shock horror). Companies that carry out innovative projects will grow, employ more people and benefit the wider economy. This is something the government is keen to encourage as a way to boost UK coffers.
2. Thinking the work is “day-to-day stuff” so won’t be eligible
You’d be surprised how much daily run-of-the-mill work is actually eligible for R&D Tax Credits. Many problems can only be solved by tackling technical or scientific uncertainties, which tends to lead automatically to R&D Tax Credits.
Prototypes and internal projects may also qualify, even if they don’t generate much money commercially.
3. Assuming the company can’t claim R&D tax relief as it didn’t make a profit
Wrong! Start-ups and SMEs often don’t turn a profit for the first few years and the government is aware of this. Loss-making companies are therefore also welcome to claim R&D Tax Credits, with the award administered as a cash payment.
4. Believing the company can’t claim R&D Tax Credits because it doesn’t have any employees
Wages are one of the biggest parts of an R&D tax relief claim, but there’s nothing specific in the rules that says a company must have employees. As long as your company is based in the UK you can apply for R&D Tax Credits.
5. Assuming that previous COVID-19 government support will bar a company from R&D Tax Credits
Wrong again. During the pandemic many companies benefitted from government support schemes like Bounce Back Loans and CBILS. And the good news is that this doesn’t mean the company can’t then claim R&D Tax Credits.
However, these supports are classed as notified state aid which will make a difference to the amount of relief claimable. Find out how state aid affects an R&D Tax Credits claim.
6. The scheme’s (rather off-putting) complexity
Unfortunately, claiming R&D Tax Credits isn’t as easy as simply filling in a form and hey presto. The application process itself is notoriously complex, with the onus placed strongly on applicants themselves to ‘prove’ their eligibility. This includes writing a comprehensive technical report to persuade HMRC officers that the project should qualify for the relief. Not only that, but every R&D project is different, so knowing exactly which costs can (and can’t) be included in a claim is far harder than it sounds. For many companies it’s all too daunting and gets put on the back burner until it's too late.
So what’s the best way to claim R&D Tax Credits?
Although it’s tempting to DIY a claim and hope for the best, the complex nature of applying for R&D Tax Credits means that success is unlikely at best. In fact, it could even attract an HMRC investigation into your wider tax affairs.
The best way forward is to get in touch with a specialist R&D tax relief consultancy. Preferably go for one that only deals in this niche area of tax, rather than a general accountant.
Many consultancies will work with you remotely so in theory it doesn’t matter where in the country they’re located, and there’s usually nothing to pay upfront. An R&D tax consultancy worth its salt will also take the time to get to know your company and your R&D project inside out. They will then work closely on building your claim with you, making sure all relevant costs are included and getting your technical report spot on.
For SMEs in particular life is tough. Costs are spiralling, and any source of additional income is always welcome. Could your company be missing out on thousands of pound worth of extra cash?