3rd September 2018

Beyond the lab: R&D tax relief isn't just for cutting edge science

R&D tax relief has been in UK tax legislation for over 18 years - and yet, many businesses are still not taking advantage of it. So what’s behind this and are you missing out?

The R&D (which stands for ‘research and development') tax credit is designed to encourage innovation and increase spending on R&D activities for companies operating in the UK.

But while £3bn a year is currently being claimed, many businesses still don’t realise they are entitled to claim - or, they aren’t claiming as much as they could. It’s a simple lack of awareness about who and what the relief is for.

Who can claim R&D tax relief?

Some businesses believe R&D relief is for pharmaceutical companies or engineering firms. But any company in any industry may be eligible for R&D Tax Credits. So If you’re considering lodging an R&D claim, here’s a three important things to remember:

  • The company is undertaking development activities that seek to achieve an advancement in technology.
  • It doesn’t need to be a physical product, either. It can be a process or a service, too. If you can show that your project goes beyond applying existing technologies and prove that it breaks new ground, you can claim R&D tax relief.
  • The R&D you’ve undertaken can be unsuccessful. If anything, that may make your claim more eligible since it illustrates an advanced degree of difficulty. In effect, R&D relief is about how, not what.

The acid test is whether you faced challenges and uncertainties in pursuit of progress.

If you took a risk by innovating, improving, or developing, there is a strong possibility a claim may be possible. A good rule of thumb is if your technical professionals are having to scratch their heads to come up with a solution and you can’t just Google it, that’s an sign you’re doing R&D.

And the potential cash and tax benefits are substantial. Under a R&D claim, you could claim back up to 33p in every £1 of qualifying expenditure as a loss making entity, or up to 26p in every £1 of qualifying expenditure if you’re making a profit.

So if your business spends £100,000, you could get a third of that back as cash. That’s cash in the company’s bank account, which will be a helpful injection of money when cash flow is tight. But this all sounds too easy, right? Surely, with a relief this valuable HMRC will strictly police any claims?

How strict is HMRC when assessing claims?

Many SMEs fear drawing the attention of HMRC. But this is often based more on myth than fact, especially when it comes to R&D relief claims.

The government actively supports R&D tax relief. The scheme brings and keeps innovation in the UK, encourages capital spend and employment and successful R&D results in employment, adds to a company’s bottom line and increases taxable profits in the future.

Political support for R&D tax relief is high. The government has even made it possible for SMEs who’ve received state grants to claim R&D tax relief on the same project. Both are considered ‘state aid’ and normally a project can’t receive state aid twice.

But if you’ve received a state grant you’re allowed to claim R&D relief under the less generous R&D relief scheme intended for large businesses (called the Research & Development Expenditure Credit (RDEC). It works in a different way to the SME scheme but does allow a project, funded by a state aid grant to have some extra R&D tax relief too.

The aim is to facilitate as much R&D relief as possible, not blocking investment. Although HMRC are more concerned with larger businesses when it comes to compliance, they have limited resources. And while they will sample check from SMEs, if the claim has been properly prepared, there’s nothing to worry about.

How much you prepare should be proportionate to the value of your claim. This can range from a short summary of your approach and a write-up of an example project, or a full structured report for more complex businesses. But neither route is particularly onerous when it comes to admin.

If you think you may have a claim, but you’re not sure where to start - then it’s worth asking an expert for help. It’s worth knowing whether you’re leaving money on the table.

Contact Deloitte Propel for a consultation on whether your organisation might be eligible to claim R&D tax credits.

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