Are you missing out on R&D tax credits?

Accounting, Research, Tax

R&D microscope

R&D Tax Credit claims have more than doubled – so why are so many companies still missing out?

Latest figures published by HMRC on R&D Tax Credits suggest that more small businesses are finally tapping into this valuable relief, with the number of SME claims so far for periods ending in 2016 and 2017 topping 34,000 – more than double the 15,585 claims made for 2013-14.

According to the statistics published in September, that represents £1.83billion of tax credits claimed by SMEs. Whilst this figure is already more than the £1.75billion claimed for 2015-16, it will undoubtedly increase as it only accounts for claims made in the first six months of 2018. Businesses can make a claim up to two years after the end of their accounting period, so the final total for periods ending in 2016 and 2017 is expected to be well in excess of £2billion.

While the report headlines are undoubtedly encouraging, deeper analysis into the figures would suggest that thousands of companies are still missing out on funding worth an average of £50,000 to each business.

What are R&D Tax Credits?

The basic principle of R&D tax relief is to reward companies that invest in developing new products, processes or services – or enhancing existing ones – via either a reduction in tax or a cash repayment. The credits can be significant, in some cases up to 33p for every £1 of qualifying spend.

Companies can claim R&D tax relief on a range of revenue expenditure – such as employee and subcontractor costs, materials and consumables, and computer software – if that expenditure was incurred as part of a qualifying R&D project. This is one which, according to HMRC, “seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty”.

There are separate schemes for SMEs and large companies (who have more than 500 employees, and either an annual turnover in excess of €100million or a balance sheet total over €86million). If your company and project meet the criteria, then you could qualify for up to 230% tax relief on those R&D costs. This means that for every £100 of qualifying cost, your company could reduce its taxable profits (or increase a loss) by an additional £130 on top of the £100 spent. If your company is loss-making, you can choose to claim tax credits rather than carry the loss forward, and receive a cash payment of up to 33p for every pound spent on R&D.

Who is missing out and why?

While there are several reasons why companies may be missing out, most of them are based on a lack of awareness of the scheme and who is eligible – issues already acknowledged by HMRC.

The Taxing Times report, published by the Federation of Small Businesses earlier this year, found that awareness of tax reliefs generally is fairly low among small businesses, with 55% of SMEs saying they were unaware of R&D Tax Credits. Perhaps more worryingly, only 7% of those who were aware had actually claimed them.

A misconception amongst businesses about the nature of research and development may be partly responsible for this low take up. For many business owners, the concept of R&D is something carried out in a laboratory by technicians and researchers in white coats. However, HMRC’s definition is deliberately wide-ranging, and “the resolution of scientific or technological uncertainty” could include anything from manufacturing processes to building techniques and food production.

The perception that R&D Tax Credits are not for us is reflected in the business sectors making successful claims. While manufacturing and information and communication accounted for more than half of the successful claims so far for 2016-17, sectors such as health, education and transport accounted for only around 1% of claims each. Mining and quarrying, real estate, accommodation and food, and electricity, steam, gas and air conditioning accounted for less than 0.5% of claims each. Any company in those underrepresented sectors which pays UK corporation tax and is trying to “resolve technological or scientific uncertainty” in its work could have a valid claim.

Some businesses may also still be unaware of the changes introduced in April 2012, which removed the minimum threshold of R&D expenditure of £10,000. Although HMRC says the change has had a “noticeable effect” on the number of first-time applicants claiming R&D tax relief, given the general level of awareness there are likely to be many businesses who believe the relief is for major research projects rather than the lower level, sub-£10,000, activity they carry out.

What can you do to claim?

The good news is that if you’re a qualifying company that has carried out R&D work which meets the scheme’s criteria over the past two years, you should still be eligible to claim R&D tax relief. As you have until two years after the end of the accounting period to submit your claim, work that was undertaken during a 2017 year end can still qualify for relief.

The important thing is to seek advice as soon as possible. The claim and calculation process itself can be complex, so talk to your professional advisers about the steps you need to take.

This article was written by Gemma Thake, Tax Manager at Price Bailey. If you would like further information on any of the above please feel free to get in touch with Gemma using the contact form below.

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