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Understanding R&D Tax Credits
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Understanding R&D Tax Credits

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April 18, 2019

Kevin R Smith is an international business and finance consultant…

According to the official HMRC report, ‘R&D tax credits are a tax relief designed to encourage greater R&D spending, leading in turn to greater investment in innovation. They work by either reducing a company’s liability to corporation tax or by making a payment to the company.’

There are a number of very notable points about this very valuable giveaway to companies. The first is that whilst it is estimated that some 750,000 companies would be eligible to claim some form of tax refund under this scheme, in the tax year 2015/16 (the last full year that complete figures are available) only 43,040 companies actually claimed under it. Whilst the scheme has become slightly more widely known in the last few years it remains relatively unknown and it seems that many accountants either do not know about it or for one reason or another do not advise their clients about it.

Companies can of course make the claims themselves but there are now many specialist firms or accountants that offer the service based purely on a success fee basis. Whilst they do of course charge a fee, most of them also claim that their knowledge of the system and what can actually be claimed enables them to obtain a higher refund overall, as well of course as doing all of the work. They would also be best placed to see if any back claims would be possible.

The point about what can actually be claimed for is an extremely valid one as the vast majority of companies that I have spoken to about R&D Tax Credits believe that a company must be doing some form of very technical R&D and can only claim very limited costs. The reality is actually almost the opposite. Exactly what percentage of what cost claimable varies, but essentially it covers the majority of costs associated with a qualifying project, including: consumables; energy; staff costs (both specialists working full time on the project and any senior management and others working part time, and this also includes sub-contract staff); and most other direct and indirect costs. 

As to the project itself, again many companies would say that they were not inventing anything and so would discount the possibility of R&D Tax Credits but the scheme applies every much as much to adaptation as it does to innovation. The majority of companies have the need to adapt what is already available and this can be everything from CRM systems to saving energy. Startups in particular are often trying to challenge or disrupt the existing markets by coming up with something new, even if this is merely an adaptation of what was previously available.

Perhaps the best bit of advice would be that if you start to do a project that you think even might qualify then it is best to do project accounting for it – that is, record all the costs separately as that will be the easiest way to prove the costs and maximise the claim.

Most companies make R&D Tax Credit claims by way of tax relief on tax due but what is very important for startups and early stage businesses is that even if the company is loss making the claim can be paid by bank transfer from HMRC, albeit at a slightly lower rate. Payments made to the company are normally received very quickly. Another very interesting feature is that for those companies not having made a claim previously claims can be made going back two years and not just for the present year.

See Also
When global labour market data is released, headlines tend to fixate on a single metric: unemployment. This year is no different. According to the latest figures from the United Nations and the International Labour Organisation, global unemployment remains relatively stable at just under five per cent. At face value, this suggests a labour market that is holding firm despite economic uncertainty, geopolitical instability and technological upheaval. In reality, it masks a serious and underreported problem: the true global jobs crisis is not a lack of work, but the growing scale of informal work. More than 2.1 billion people worldwide are employed in the informal economy, including misclassified workers operating outside effective regulatory coverage, where employment is typically unregistered, contracts are absent or unenforced, and access to labour rights and social protections is limited or non-existent. That represents a large portion of the global workforce. If unemployment reveals how many people cannot find work, informality shows how many are working without protection or long-term opportunity. Informal work is often associated with developing economies or unregulated sectors. However, this form of work is increasingly occurring within developed economies and regulated sectors, hidden within otherwise legitimate, fast-growing small and medium-sized enterprises – and this is often unintentional. For both businesses operating solely in domestic markets and those that have expanded abroad, adopting new workforce models and attempting to respond to rapid technological change, the crisis of informality is emerging in three key areas. The first is worker misclassification. Individuals are engaged as independent contractors but operate in practice like employees – working fulltime, at set hours, for years at a time. This is particularly prevalent in gig and platform-based roles, where algorithms determine pay, hours and performance without considering employment rights. Gig and platform work often presents as flexible and empowering, however, in practice, many platforms exercise employer-like control over payment, performance management, hours, and length of engagement, while explicitly avoiding employer obligations such as tax filings and the provision of statutory benefits like annual leave and healthcare. The result is a growing cohort of workers who fall between legal categories, carrying the risks of self-employment without the autonomy or protections that should accompany this mode of work. The second area is cross-border remote work, where informality can inadvertently arise. With post-COVID remote working models here to stay, companies are directly hiring overseas talent, assuming that because the worker is not based in the company’s home country, local employment laws do not apply. Where employment is not properly registered (whether by the employer and/or employee), local labour law is not applied, or social security obligations are misunderstood or ignored, these arrangements can slip into a form of modern informality, even where the relationship appears to be formal on the surface. This is often the point at which organisations begin to seek external guidance. In many cases, neither party fully understands the legal implications of the arrangement, which leaves both employer and worker exposed. We frequently see organisations approach us when a specific issue surfaces, such as payroll inconsistencies, questions around benefits entitlement, or concerns raised by the workers themselves, including registration process failures. Business leaders should also be aware that permanent establishment risk can arise if a remote employee is deemed to represent the company locally, which can trigger corporate tax obligations. Social security errors can happen when contributions are not made correctly in either jurisdiction, leaving workers without coverage and employers facing backdated liabilities. Meanwhile, employment law conflicts can emerge when contracts fail to meet the requirements of the host country regarding notice periods, benefits or termination rights. The third driver of informality is structural. These arrangements are becoming more common as artificial intelligence and evolving workforce models outpace regulation. Businesses are innovating at speed, but legal frameworks are struggling to keep pace. The UK’s Employment Rights Act offers a clear case study of the direction of travel. Worker protections are expanding, classification rules are tightening and enforcement is becoming more coordinated across agencies. Informal arrangements that once sat in legal grey areas are moving firmly into view and what was previously tolerated is falling under scrutiny. The challenge is that informality is rarely a deliberate choice. For many growing organisations, it becomes the default because compliant pathways are complicated and difficult to navigate alone, particularly across multiple jurisdictions. Legal advice, payroll, tax, HR, and immigration compliance are often siloed, leaving gaps that businesses may not even realise exist until a problem arises. For instance, digital nomad visas are often viewed as providing holders with wholly compliant right to work status, however employers may not realise that this is not always the case and contracts may not reflect the correct legal status or entitlements. Addressing informality requires a change in how we think about employment at a global level and recognising that flexibility and compliance are not mutually exclusive. Businesses need models that allow them to access global talent quickly while ensuring workers are properly employed and protected under local law. As attention remains fixed on unemployment figures, informality continues to expand beneath the surface. It is this hidden cohort of workers, contributing economically without security or rights, that represents the real crisis in the global labour market. Solving it will require coordinated action from policymakers and businesses alike, and a commitment to building workforce models that are not only innovative, but sustainable and fair.
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So my advice is very simple, think hard about what your company might have done over the last two years that might enable you to claim an R&D Tax Credit and then speak to a few companies that could advise you on that or make the claim on your behalf. I am sure that a large percentage of those reading this will be very pleasantly surprised and will find their company receiving an unexpected cash injection courtesy of HMRC. For startups that are often tight on cash this can make a very crucial difference.

Next time I will look at another aspect of being a Mentor and how that experience might be useful to other startups and early stage businesses.

2019-04-18

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