R&D Tax Credits Overview
For non-financial Entrepreneurs and Business Owners.
Taking a complex subject and trying to explain it in everyday language!
The Essence of R&D Tax Credits:
R&D stands for: Research and Development
Research and Development is all those times when it was not obvious to you what to do next.
The reality is, in many real-life situations in the UK, R&D tax Credits are claimed retrospectively (In the UK companies can claim R&D Tax Credits up to 2 financial periods retrospectively).
R&D Tax Credits are available in 38 countries; however, R&D Tax Credits in the UK are the most generous, primarily because successive UK governments would like UK based businesses to innovate, become leaders in their field, and commercialise their ingenuity.
Below are some easy read bullet points covering: what activities/projects can be included in R&D Tax Credits; who can claim; how to claim; when to claim and why claim?
The R&D Process:
Qualifiable R&D activities can start when someone on the Team thinks “There must be a better way to do this” or accepts a challenging request from a client and start scratching their heads thinking about how to deliver the results, the process lasts, all the way through proof of concept, prototype development through to complete and final testing of the products/services.
N.B. For a project to qualify for R&D Tax Credits we always have to be able to prove there is no certain outcome (Uncertainty = Risk = R&D) - and there must be some sort of technical or scientific challenge
We also have to be able to prove the company are best placed to carry out these R&D activities because they have the experience and expertise to do so, and what they are doing could be classified as Industry leading.
Who can Claim (in the UK)?
- Any Limited Company registered with Companies House that is trading (Note: Partnerships, Charities and Not-For-Profit organisations usually cannot claim as they do not pay Corporation Tax like regular Limited Companies, and the R&D Tax Credits are part and parcel of Corporation Tax).
N.B. R&D Tax Credits have been an integral part of Corporation Tax since 2001.
- Loss-making companies - if, for example, a company made a loss last year and did not pay any Corporation Tax, they can still claim R&D Tax Credits on qualifiable activities.
What constitutes qualifying R&D Activities?
Whenever you use or hear the words:
Modify Adapt Improve Enhance
These usually indicate R&D Activity.
Most R&D claims are calculated around a company’s Payroll Bill.
Internal R&D - can include automating systems and processes to make the company more efficient and streamlined. N.B. Using standard off-the-shelf software platforms does not count as R&D unless someone has had to recode and adapt it to suit bespoke client requirements. R&D is often carried out to reduce labour and/or energy costs to make a company more competitive.
It can also include speculative projects where the company has spotted a gap in the market and is trying to develop a product or service to fill that gap. These projects may or may not be successful, but they will usually involve Qualifiable R&D Activities.
External R&D - when a client requires something very bespoke or challenging, and they ask your company to provide the service/product due to the expertise your company has, or is presumed to have, in that field. This could even be to replicate a similar product already available, but at a much more competitive budget…
(Note: There are some complicated rules around sub-contracting which can sometimes disqualify a project, however always best to discuss with a specialist if you feel you may have a project that may be R&D related).
How to claim:
- R&D Tax Credits can be worked out based around the costs associated with all the qualifiable R&D activities or projects undertaken by a company during a certain financial period. Qualifiable R&D costs are then established and calculated based on the guidelines set out by HMRC. It is not possible to accurately calculate the value of a claim until all the relevant financial information such as – Statutory accounts, payroll, Final Tax Computations, and costs associated with the R&D projects are assessed and calculated.
- Technical Narrative - Accompanying every Claim for R&D Tax Credits there is a requirement for a strong technical report to justify the claim and highlight to HMRC exactly what the R&D Activities were, why they qualify as R&D and why another specialist could not have completed the project.
When to claim and why claim:
- If you are a growing company, trying to keep ahead of competitors, or maybe even thinking of disrupting your market then chances are you will have R&D Tax Credits due to you.
- Try to gather the required information for your claim a few months ahead of your financial year end as it takes a while to prepare the technical report and calculate the claim and nobody enjoys a last-minute panic!
- Why? Successful R&D claims will result in either cash-back or significant reduction of the corporation tax liability of the company and we would suggest R&D Tax Credits are the most powerful Tax Planning tool available to UK companies currently. Certainly, something for both young and mature companies to consider when doing their strategic planning.
We often come across companies who are misadvised by their accountants and financial advisors that they have no qualifiable R&D to claim.
This can be a sad situation, however sometimes we are able to convince some of these companies they do have R&D and we then claim significant amounts for them to re-invest into the company.
An R&D Mindset can be extremely powerful, particularly when making investment decisions, buying or selling companies or quoting/tendering for work contracts.
Require more information?
Contact us to check if you could be claiming R&D tax credits - Johno Harris from Aspen Waite on 07943 307431 or e-mail firstname.lastname@example.org