Tax Breaks – are you missing out?
How often does the taxman give tax relief on more than you have actually spent or buy your losses from you? Many companies are missing out on generous Research and Development tax relief under the small and medium sized enterprises (SME) scheme at 230% on allowable R&D costs or the large company scheme at 130% relief. This means that for each £100 of qualifying costs, an SME company could have the income on which Corporation Tax is paid reduced by an additional £130 on top of the £100 spent. It also includes a payable credit in some circumstances. The average annual claim for an SME is £46k.
“We have worked together over the past four years on these claims and received a nice five figure sum which went straight to the bottom line to invest in staff costs and further R&D”
Tom Arundel, Director
Introversion Software Limited
Precision Microdrives Limited
The thought of Research and Development conjures up the image of scientists in white coats scratching their heads while staring into the blue sky seeking inspiration. Perhaps it is this image that has led to the misconception that R&D claims may only be made for cutting edge and brand new products with the result that opportunities to save substantial amounts of tax have been lost.
The Government is determined to encourage and support innovative and pioneering companies, and is using the tax system to bring this about. The scheme is structured in such a way that the tax advantages can accrue and companies should not be put off making a claim believing their products do not qualify, or because the claim process is too onerous – it’s not.
So what is R&D for this purpose? It either has to involve the resolution of a technological uncertainty or use an existing technology in an unusual or innovative way. The point here is that existing technology can be utilised, which puts paid to the notion that only new inventions qualify. That said, routine cosmetic improvements do not count. Examples of the types of industry sectors in which companies we have helped to claim operate in include cosmetics, video games, computer software, web design, engineering and transport.
When offering our initial advice to our clients, we ask them the following four questions:
- What is the scientific or technical advance?
- What were the uncertainties in the project?
- How and when were the uncertainties overcome?
- Why was the knowledge being sought not readily deducible by a competent professional?
If these questions can be answered in a positive way then a claim should be considered.
The claim can cover a wide range of costs, to include staff costs and subcontracted costs as well as the more obvious and specific costs ‘consumed’ in the R&D process.
The tax credit is made available as a significantly enhanced tax deduction based on R&D expenditure which can be used to reduce the company’s tax liability, or, in the case of an SME making losses it’s possible to surrender tax losses for a cash payment from HMRC thus boosting cash flow which can be invested in growth. Just what’s needed when R&D costs are draining the company bank account. The large company scheme is less generous and there is no cash credit available. However, this is being replaced by a new scheme, the RDEC scheme, which does allow a loss making company to receive a repayable tax credit. At present a large company can elect which scheme to use, but after 1 April 2016 only the RDEC scheme will be available.
A claim must be made with two years after the end of the relevant accounting period. If a company has already filed its tax return it is worth reviewing its activities to see if any of them qualify as R&D. If they do, an amended return encompassing a claim should be filed. Just make sure the review takes place in sufficient time to allow for the claim to be quantified and submitted within the time limited.
Don’t think an R&D claim only applies in rarefied circumstances – this isn’t the case.
Don’t think an R&D claim is a one off – again, this isn’t the case. A claim can be made for each year your company has qualifying expenditure.
Many specialist companies have set up shop to advice on these claims charging a percentage of the claim. Hamlyns believe their clients should utilise this extra cash flow to further their businesses and we only charge our normal rates. Hamlyns has detailed practical knowledge of R&D claims and deal with them on a regular basis. We are able to put forward both the numbers (ensuring all eligible costs are included) and most importantly, to assist you to construct a narrative that tells HMRC what they need to hear in the best format to advance the claims process. We have helped our clients claim thousands of pounds worth of R&D credits and have a good working relationship with HMRC.