The Changing Face of R&D Tax Relief
Nick Cook, a claims specialist from RandDTax, profiles the improvements than have been made to R&D tax relief in the last few years, and provides some examples to shed light on the opportunity that many companies are missing.
Back in 2010, when R&D tax relief and tax credits were last profiled in the newsletter, the R&D tax relief scheme was generally poorly understood by businesses. Sir James Dyson had recently published his influential 'Ingenious Britain' report, and the new Government was taking note! However, although the scheme was very valuable, with an average claim worth over £41,000 per annum for 'small' businesses, take-up of the scheme was patchy, with less than 1 in 500 companies making claims. Of course, not every company performs research and development, but there are many companies that "overcome scientific or technological uncertainty" to develop new products – and these activities will often qualify under the R&D scheme.
Since 2010, both the 'large' and 'small' company schemes have been improved year-on-year. Rates have been improved to the point that now, for the 'small' companies scheme, the additional tax relief is worth around 25p to 30p in every £1 spent on qualifying activities, and a tax credit (HMRC paying the company) is worth up to around 25p in every £1 spent.
And there have been simplifications to the scheme, with some of the previous rules removed or changed, for example:
- There is now NO requirements for formal ownership of intellectual property
- There is now NO minimum threshold for R&D qualifying expenditure
- There is now NO cap to the relief based on the amount of PAYE and NICs paid when tax credits are claimed
- The maximum size threshold for a 'small' company has increased to 500 employees, with a turnover of 100 million Euros or balance sheet of 86 million Euros. This has doubled the maximum size of an eligible 'small' company or group.
The main problems perceived by companies thinking about making claims are typically (i) lack of understanding of how the definitions around qualifying expenditure apply to their particular business, (ii) a perception that everyone in the business is too busy to understand the legislation and to prepare the necessary information for the claim, and (iii) the belief that record keeping may be too onerous.
Let's deal with these one by one
(i) Qualifying expenditure is the cost associated with qualifying R&D activity and can include employee above-the-line costs, consumed items, suitable apportionments of utility costs, and a proportion of subcontractor costs.
Qualifying R&D activity is work done in overcoming uncertainty to make an advance in a scientific or technological sphere, where the improvements sought are not routine or obvious to a competent professional (i.e. your technical specialists). This can include adapting technology from one area to another. In practice, product development projects of many products that include science or technology will have at least some qualifying activity, and, within certain rules, work done in extending a company's capability whilst working on customer projects might also qualify. To be certain, it's worth reviewing all suspected projects with an expert.
(ii) Everyone is always too busy. In practice, it should be possible almost anywhere to invest 1-2 hours of 2-3 staff to decide whether the company could increase its shareholder funds by tens of thousands of pounds.
(iii) Record keeping – many companies now rely on MRP, ERP, job scheduling, or timesheet systems. I have rarely found a company that doesn't already have the basic documentary records suitable to make a claim. Very often the only change needed for the future is to add a step to existing systems to record any work that might be R&D throughout the year.
Sometimes, companies think that they are not doing anything that would qualify. Here are some examples of companies with successful claims:
- A test and calibration specialist developing an innovative air flow testing device and deep cleaning processes for heat exchangers. A precision engineering company designing and manufacturing parts from difficult materials, and complex shaped parts difficult to manufacture.
- A legal company developing award winning, innovative, paperless conveyancing processes.Numerous software development companies developing innovative Cloud based eCommerce and eBusiness systems.
- A construction company developing project and work control systems using mobile and internet technologies to transform processes, and profitability in managing large refurbishment contracts.
- A winch design and manufacturing company, developing innovation solutions where none were previously available.
- A financial services business able to respond with innovative products and marketing/sales methods through the rapid development of eBusiness software.
- A firm of bailiffs able to develop portable and web systems that transform operational processes efficiency and cash collection rates.
- A software development tools company able to create an innovative development platform.
- An injection moulding company specialising in developing the tooling and manufacturing process to address very complex moulding challenges, creating innovative products and components.
- A number of companies developing innovative, low cost web hosting services.
- A conveyor designer and manufacturer creating innovative conveyor systems and controls.
- A highly successful electronics manufacturer winning significant international business, through finding more innovative designs, materials and manufacturing processes.
In practice, there are no limits to the industries that might qualify, provided the products, services or business processes involved require research or development in areas of science or technology.
RandDTax has extensive experience across all of these areas, prides itself on being one of the lowest cost and high quality providers in the marketplace and will discuss possible projects containing qualifying R&D expenditure with businesses on a no claim no fee basis. For more information go to www.randdtax.co.uk or call Nick Cook on 07813 024057.