Last month HMRC released the statistics for Research and Development (R&D) tax relief claims in the 2014/15 tax year. These showed a 12% increase in the total number of claims made, with a 16% increase in claims by small & medium-sized entities (SMEs). The amount of tax relief provided increased by 38%, with eligible R&D expenditure up by 31%. This suggests that on-going activity by HMRC, not to mention accountancy firms and specialist practices, to raise awareness of R&D tax relief is continuing to pay off, but it is still common to find companies unaware that they could be claiming R&D tax relief.
What are they missing out on? Based on current rates, an SME carrying out eligible R&D could generate £46 tax savings for each £100 they spend on qualifying costs. If the company is loss making, it could claim a cash credit of £33 for each qualifying £100 spent. The rewards are not as great for companies unable to claim as SMEs, but they could still receive R&D Expenditure Credits (RDEC) worth £8.80 for each qualifying £100 they spend. What, then, are the reasons we find for eligible companies not claiming?
“We’re not scientists.” The biggest remaining misconception about R&D tax relief is that it is only available to companies with laboratories full of scientists in white coats. Nothing is further from the truth. As long as the R&D project is intended to push forward knowledge or capability in an area of science or technology it is worth exploring its eligibility. HMRC’s statistics for 2014/15 reveal that the most common areas for claims are manufacturing (30%), information and communication (25%) and professional, scientific and technological services (20%), none of which should come as any surprise. Sectors where more than 100 claims were made in the year include administration and support services, construction, transport and storage, arts, entertainment and recreation, education, health and social work, and finance and insurance. That covers a wide range of activities, in many of which there’s not a single white coat in sight.
“We’re not an R&D company and/or this project is a one off.” Unlike some tax regimes, where R&D tax relief is only given on incremental increases in R&D year on year, the UK rewards companies carrying out one off projects in exactly the same way as serial developers. What matters is that the project meets the qualifying criteria to be treated as R&D for tax. That means that companies considering a one off product development project have the same entitlement to claim as regular innovators.
“We’ve already got a grant, or our customer is paying us.” We frequently have to explain to companies that if their project is grant funded or they are carrying out the R&D as a subcontractor they cannot claim the SME R&D relief. This highlights how important it is to weigh up all the options at the start of a project. Which will prove more valuable in the long run, the grant or the R&D tax relief? Too often we’re not involved until after the grant application has been made, but even in that case all is not lost. What the company may not realise is that they can still claim the RDEC. Similarly, if a company is carrying out subcontract R&D for a customer (as long as the customer is located overseas or is not a UK-based SME) they are eligible to claim the RDEC, even though they are prevented from claiming the SME relief. The RDEC may not be as generous as the SME relief, but then again any relief is better than none.
“We’re not spending enough/we don’t pay enough PAYE.” In the early days of R&D tax relief, companies had to have R&D costs in excess of £50,000 (later reduced to £10,000) in the year for which they were claiming. That requirement was removed from April 2012, so there is now no barrier to companies with lower levels of R&D costs claiming. At the same time the cap on the cash credit for loss making SMEs was removed. This used to limit the available credit to the PAYE/NIC paid for the equivalent year, and so made the relief less attractive for companies with high levels of R&D expenditure but small wage bills. Now the only limit on the amount of credit that can be claimed is based on the level of qualifying expenditure.
“We’re not tax paying, so there’s nothing in it for us.” The SME tax credit has always been attractive to loss making companies because it can provide vital cash to fund on-going R&D projects. With no equivalent under the old large company scheme, loss makers that couldn’t claim as SMEs were less enthusiastic. That changed with the introduction of the RDEC as this includes a cash element available to non-tax paying companies, and provides the same level of cash (£8.80 for each £100) as the tax saving that profitable claimants receive.
“We only incorporated when we were ready to go to market.” It is true that an individual who decides to form a company only once the R&D is complete is going to miss out. This is because the R&D tax reliefs are for companies only, so the question of whether or when to incorporate needs to be considered earlier rather than later. Of course, incorporation is not going to be the right answer in every case, but it is far better to have considered and rejected it, than to find out too late that a valuable tax relief has been missed.
We are still in a relatively benign climate for R&D claimants, but that could change as the costs to the Exchequer increase. Companies who are already claiming relief and new claimants alike can ensure they are prepared for any increase in HMRC activity by making sure that their claims are supported by robust documentation. The Ensors’ Corporate Tax Team are here to support with this and to help develop methodologies for identifying eligible projects and costs.