R&D tax relief still under-claimed
Every year HMRC publish statistics about the take-up of the very generous Research & Development tax credit regime and this year’s review has yet again illustrated that the relief is often underclaimed. It seems that many companies and their advisers are simply not fully aware of the types of activity that qualify and therefore literally millions of pounds in relief are being lost.
Summary of the relief
In very simple terms, the relief works by “super-sizing” any R&D spend for the purposes of calculating a company’s corporation tax liability. Any qualifying spend is more than doubled, to 230% of the original, and then the company’s corporation tax liability is recalculated and reduced accordingly. At current corporation tax rates of 19% the benefit is an additional 24.7% of the original spend (i.e. 130% x 19%). If the company is loss-making then they can still benefit, by surrendering the R&D loss for a cash payment from HMRC. The cash payment is equal to 14.5% of the R&D loss, and so equates to 33.35% of the original spend (i.e. 230% x 14.5%). As you can see, the sums can be considerable.
You can also go back to any open years (usually two) and amend historic returns in order to claim further relief.
Who is claiming?
Most obvious candidates (although by no means all), such as technology companies and pharmaceutical research companies do claim the relief. However, the HMRC statistics show that the most common category of claims are in the following sectors:
- Manufacturing (28% of total number of claims, 32% of value)
- Professional, scientific & technical (20% & 23%)
- Information and communication (26% & 20%)
What this shows is that in fact most claims are not from the scientific or technical community but from manufacturers, which are often the bedrock of the client base of many accounting practices. All accountants and tax advisors should therefore be regularly reviewing their client base to see if any may indeed qualify but simply do not realise it .
What is R&D?
It is beyond the scope of this note to give a full explanation of what is and what is not R&D. The legislation defines it as “an advance in science or technology”, and this is what often puts people off as they assume that you need to have made a major breakthrough in order to qualify. But this is not the case at all. Most R&D claims are for small incremental improvements made to a process or a product, and this is what companies do all the time. When I speak to clients, the first test I always ask them is whether there is any aspect of their business which has required them to scratch their head in order to find a solution. If the answer is “yes” then there is a good chance that there is R&D and we investigate further.
Examples of successful claims are often useful in illustrating how common R&D is:
- A manufacturer of large electricity generators was required to fit one of its generators in a confined space and therefore had to re-design it to fit into a smaller area
- An IT company project to integrate different information management systems on behalf of a client (integration is a very common theme in R&D claims)
- A top-end restaurant experimenting with new ingredients and flavour combinations
- An aerospace manufacturer developing new tooling
- An engineering company designing a prototype of a new product which was an improvement on an existing product
As you can see many of these would be the type of activity which is regularly done by a company in its everyday life.
It can be a complex area though, and so we offer a free review service whereby one of our team will come out to see you and go through your client list (on a no names basis if you prefer) to try to highlight where there might be claims and then take it from there.
If this is of interest please contact firstname.lastname@example.org or call 01332 365855