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R&D: Research, Relief & a Lack of Awareness
In recent years, Britain has become fertile ground for those with an entrepreneurial spirit.
Last year, in fact, the number of new companies formed was a new record with more than 650,000 businesses set up.
A considerable proportion of those are relatively small enterprises but still capable of making a significant impact.
According to figures published by the Federation of Small Businesses, of the 5.7 million private companies trading in the UK at the start of this year, 99 per cent were SMEs with combined sales of £1.9 trillion – more than half of all private sector turnover.
News reports, however, have suggested that although there are clearly businessmen and women capable of running successful firms, many are failing to take advantage of support to propel their companies even further forward.
One detailed how more than half of Britain’s 3.5 million small-to-medium-sized enterprises (SMEs) are not claiming tax relief which those engaged in research and development work are entitled to.
The amount involved has been calculated as a possible £84 billion.
Such reliefs are generally regarded as having considerable benefit for innovative companies.
The support is not just for SMEs, of course. For instance, in the most recent Budget, the Government increased the rate of R&D expenditure credit for big business by one per cent from the start of next year.
It means that qualifying firms will benefit from a taxable 12% credit to provide a potential a cash benefit of 9.72% of R&D qualifying costs.
The potential rewards for SMEs, though, are far greater and more flexible. They can actually claim an additional 130 per cent of their qualifying research & development expenditure against profits, using it to reduce their potential tax liability. Where the company is loss-making, this may be offset against profits charged to tax in the previous 12 months resulting in a tax rebate, or carried forward and offset against future profits reducing tax payable in future years. The benefit here being 19% (the tax rate in effect for a relevant year) of the additional expenditure. Alternatively, one may opt to ‘surrender’ the loss in return for a payable 14.5% credit.
The R&D scheme is open to both SMEs and larger companies that can demonstrate scientific or technological innovation and advancement.
It’s a government scheme, administered by HMRC, aimed at incentivising innovation across the UK economy.
Businesses from all sectors may be eligible – not just those in the science and technology fields, or with R&D functions.
The main requirement is that you are working towards achieving technical and scientific advances through projects where uncertainty in the outcome exists and the methods used to achieve success are not readily deducible.
A cumbersome and not entirely helpful definition, meaning it’s not always clear to businesses if they are eligible in the first place!
At Enterprise Tax, we have developed a questionnaire designed to help businesses ascertain if they can make a claim, before moving on to look at what the actual claim would include.
You can only make a claim against ‘qualifying spend’ that’s attributable directly to the R&D activity being claimed for – e.g. the cost of people involved in the R&D (staff, trial volunteers) and the cost relating to software, utilities and materials used or consumed when carrying out the R&D.
The scheme only covers revenue expenditure and not capital expenditure. For capital expenditure, the R&D capital allowances scheme may apply.
There are a number of other considerations when identifying eligibility and the size of claim. Abortive projects for example can still be claimed for, where they meet the innovation criteria.
You then make your claim for research and development tax relief within your corporation tax return. Relief is given by either reducing the amount of corporation tax payable if you are making a profit or, where you are in a loss position, by claiming a payment direct from HMRC or carrying the resulting loss forward to future accounting periods.
Some commentators have blamed that there is a simple reason why the rather low rate at which these benefits are taken up is because many SMEs are simply unaware that they’re on offer.
However, I don’t believe that represents the whole story.
Myself and my colleagues at Enterprise Tax work with an increasing number of small businesses, helping them gain and fully utilise these reliefs.
One common concern which they make clear is that the administration of the various schemes can be confusing. A proportion of SMEs worry that failing to meet what can appear as very intricate criteria could lose them Treasury support and even make them unattractive to private investors.
That’s despite the fact that of the vast majority of applications for these quite generous tax reliefs available are successful. Of the claims we have submitted on behalf of our clients to date, none have been rejected by HMRC.
Understandably, it comes down to seeking guidance as to what you’re entitled to and how you can best go about obtaining that support.
That kind of expert advice and the knowledge of what to do to fulfil your potential and provide for a healthy corporate future can be…well…a big relief.
As experienced tax consultants, ETC advise on all aspects of the research and development tax relief scheme.
We have a thorough understanding of the types of projects that qualify for research and development relief, the costs that come under the scheme, and how and when to make a claim.
Since the more that you identify, the more you can claim for, we have the experience to advise on project eligibility and evidencing your claim. For example, we routinely engage with business’ R&D staff to ensure we have covered all areas of cost and R&D activity.
Contact us for a no-obligation initial conversation about research and development tax relief with one of our chartered tax specialists.