R&D Tax Credits - Is your innovation being rewarded?
Although R&D Tax Credits have been available to businesses since 2000, many SME companies are not aware that they could be eligible for this valuable tax credit, worth up to 33.35p in the £1.
The R&D Tax Credits Scheme is looking to reward companies that have made an advance in science and technology by overcoming a scientific or technological uncertainty to achieve this advance.
It is the wording identified above that tends to make companies think that they do not qualify for R&D Tax Credits; with many believing that this restricts the tax credits to white coat scientific research or believing that overcoming problems is part of their day to day job. However, H M Revenue & Customs’ (HMRC) guidelines relating to R&D demonstrate that the tax credits are available to a much wider audience.
An advance in science and technology 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. This is not restricted to ‘white coat’ research but can be equally applied to ‘brown coat’ development work in design and engineering that involves overcoming difficult technological problems.
The key to filing a successful R&D claim is to show that the work the company has carried out has extended overall knowledge in a field of science and technology and that the uncertainty involved in the project could not be readily resolved by a competent professional or solutions to the uncertainty were not common knowledge in the industry.
Examples of areas where successful claims have been made include software development, engineering design, product development, new construction techniques, bio-energy, cleantech, agri-food and life and health sciences.
In terms of the costs that qualify for R&D, the main cost will be a proportion of staff member’s salary including national insurance contributions that relates to R&D. Other costs that can be claimed for include third party contractor costs, materials used for prototypes and software used for R&D purposes.
For every £1 spent on R&D costs the company is entitled to an additional £1.30 as a deduction against trading profits. For a profit making company, this will equate to an additional 24.9p of tax credits for every £1 spent on R&D. For a loss making company, generally this will equate to a cash repayment of 33.35p for every £1 spent on R&D.
If you have a December year end then there is still time to consider if the company has undertaken any R&D activities in the 2016 year end. A claim would need to be submitted by 31 December 2018 as otherwise you could miss out on a year’s worth of R&D Tax Credits.
The average claim size for an SME throughout the country, per HMRC statistics released in September 2017 for the 2015/16 tax year is £61,514 with an average size North West claim being £39,301. The manufacturing, IT and Professional, scientific or technical services sectors are the biggest claimants of R&D but we have also had experience of claiming R&D Tax Credit in the Education, Agriculture and Construction sectors.
For advice and guidance on R&D Tax Credits and if it is applicable to your business please contact Phil Hartley for a no obligation conversation.
Director of Tax0161 817 6100Manchester
Written September 2018.