Laurence Bard, tax partner and Research and Development (R&D) specialist at Smith & Williamson says that many businesses are investing large sums into developing IT systems, for example, but the firms are unaware that they could qualify for R&D breaks.
Research and development tax breaks
‘Expenditure on systems development is widespread and companies are missing out. Following further increases, cash repayments of up to 33 per cent of qualifying R&D expenditure can now be claimed and this money feeds through to the current year, helping to boost a business’s profits,’ adds Bard.
The government has confirmed its commitment to R&D tax credits in a new report and this, combined with a slight further increase in the amount which businesses can reclaim, is good news for organisations in any sector, adds Bard.
Subcontractors undertaking work for other businesses are also eligible for the tax credits.
According to the report by HMRC, £1.4 billion was claimed in tax relief on R&D from April 2012 to April 2013, the most recent year for which information is available.
Claims must be submitted no later than two years after the end of the year in which the money was spent. For example, businesses with an accounting year end of April 30th have until April 30th 2015 to submit claims relating to 2013.
Tax specialists at Smith & Williamson analysed the figures and noted sector and regional imbalances.
Bard explains, ‘The number of claims by SMEs in the finance and insurance, construction, real estate, arts and health sectors are particularly low. However, where successful claims have been made by firms in these sectors, the average sums received have been among the highest.
‘We therefore believe there could be considerable scope for businesses in these sectors to claim R&D tax credits.’
HMRC’s definition of R&D
Lesley Stalker, tax partner at Surrey accountants RJP LLP, believes that one of the biggest issues is due to companies not fully understanding that the way HMRC defines R&D for the purpose of claiming tax credits is very different to the standard dictionary definition.
On its website, HMRC defines R&D for the purpose of this initiative as follows:
‘The company must be carrying out research and development work in the field of science or technology. The relief is not just for ‘white coat’ scientific research, but also for ‘brown coat’ development work in design and engineering that involves overcoming difficult technological problems. This can include creating new processes, products or services, making appreciable improvements to existing ones and even using science and technology to duplicate existing processes, products and services in a new way. But pure product development in itself does not qualify’
In addition, one commonly-overlooked opportunity which qualifies as an example of ‘using science and technology to duplicate existing processes, products and services in a new way’ is in the potential to claim for an investment in developing new IT systems. Stalker says, ‘We recently advised a company that had developed a new software system to improve its own internal processes and they were able to secure a tax credit of £250,000 after submitting an enhanced claim in excess of £1 million.”
Two thirds of the total amount claimed came from companies registered in London, the South East or the East of England.
Loss-making SME businesses are now eligible for a repayment of up to 33 per cent of qualifying expenditure, whereas those which are in-profit can claim a tax credit of 46 per cent of qualifying expenses.
Bard adds, ‘The potential for R&D tax claims on IT development arises, as software is specifically recognised by the tax authorities as technology, and its development is often difficult and uncertain.’
The resolution of technological uncertainty in respect of software can present significant opportunities to claim R&D relief, Bard continues.
‘If your staff are experienced professionals working in the field, and they consider their development assignments to be uncertain as to whether or how results can be achieved, you should look into the potential for an R&D tax claim.
‘It doesn’t matter if competitors have already found a solution – unless they have published the mechanisms behind their discoveries.’
Although R&D tax credits were originally launched 18 years ago, it looks like they will be here to stay for the foreseeable future. The current government has repeatedly reaffirmed its commitment to continuing the scheme and in fact introduced a number of further enhancements to make it easier to access and more valuable.
‘Expenses are now included and companies have the ability to claim for business expenses incurred by employees during the course of the ‘research’ and reimbursed by the company,’ says Stalker. ‘Provided tax payments are up to date and there is no track record of being involved with tax avoidance schemes requiring a disclosure, companies eligible under the enhanced scheme and that have never made an R&D claim in the past can now also get advance assurance from HMRC that a future claim will qualify,’ she adds. This means they can have the financial reassurance of future tax relief being available before actually embarking on a project.
Small and medium-sized enterprises (SMEs) taking on work as sub-contractors are also eligible. Only 575 sub-contractors claimed in the 2012/13 tax year, suggesting there is little awareness of the opportunities.
SMEs can benefit from an enhanced rate of R&D tax credits compared to larger businesses. To qualify, SMEs must employ fewer than 500 people, and have either an annual turnover of no more than €100 million or a balance sheet total not exceeding €86 million.
Smith & Williamson has set up an R&D calculator which is available here and is free of charge. It provides businesses with an immediate indication of how much they can claim in R&D tax credits.
Further reading on tax credits