So what are R&D tax credits? According to HM Revenue and Customs (HMRC), they are a tax relief designed to encourage greater spending by companies in R&D. They work by reducing a company’s tax bill by an amount equal to a percentage of its allowable R&D expenditure. The effect, it is hoped, is the companies will make a greater investment in innovation.
Statistics recently released by HMRC show the total number of claims for the accounting period from 2013 to 2014 rose to 20,100, driven primarily by a 23% increase in the number of claims from small to medium enterprises (SMEs). The amount of support claimed was said to have risen to £1.75billion – £380million more than in the previous year – of which SMEs claimed £800m.
So what is eligible for R&D tax credits? In order to claim, you must be seeking to achieve an advance in science or technology. The issue you’re working on must be subject to what is called scientific or technological uncertainty and have been conducted in a systematic and thorough fashion. If you can tick these boxes, you can claim for such things as staff costs and the cost of materials.
Jeremy Tear is a director of GGTC, which specialises in helping companies to access R&D tax credits. He notes the Government is increasing its investment in the scheme. “When the scheme was first introduced, the Government gave you 50% relief. Increases over the last six years have seen that rise to 125%.”
In Tear’s experience, the major issue with R&D tax credits is that companies don’t know what they can claim for. “It is sometimes difficult to understand what the definition of R&D is. One of the claims we have done was for a horse saddle, but the claim wasn’t for the saddle itself, it was all about the science behind the product.
“Another useful definition,” he continued, “is that technological uncertainty is something that is not readily deducible by someone in that field. And if you have to overcome a problem for which there’s not an immediate solution, the chances are that’s advancing the science.”
Tear suspects this confusion about what is or isn’t eligible could be affecting the readiness of companies in the electronics sector to claim for their R&D work. “It’s quite probable that electronics companies operate on the assumption that science is being done because they’re using it, rather than the fact that they’re creating it. But the definition used by HMRC is that if you come across what it calls technological uncertainty and solve that problem, then you’re doing science.”
With the large number of companies making claims and the sums of money involved, you might expect the R&D tax credit scheme to be well staffed, but that’s not the case. Tear says there are just a handful of inspectors in HMRC dealing with this issue. Those inspectors will, however, examine all claims, perform some risk evaluation and will probably take a closer look at around 10% of them. “And their enquiries will be thorough,” Tear pointed out.
Tear sees three broad areas of confusion when it comes to R&D tax credits. “The main area focuses on an assumption of what R&D actually is. It’s not about features and benefits. I have dealt with a client who couldn’t think beyond what his product did, but he needed to think about how it was made,” Tear recalled. “We have a team of analysts who can ‘get behind’ a product and understand the science involved.
“We often have clients who come to us having been told by HMRC their application was not accepted. One of the general issues here is that accountants don’t always understand the processes or the technology involved.”
Another area where Tear sees issues is in understanding what can or can’t be claimed for – and how much. “There’s a dangerous practice amongst some claimants which suggests that if you don’t claim for too much, you’ll ‘get away with it’. The problem here is that HMRC expects you to claim for everything, as long as it’s a legitimate claim.”
Until recently, companies could only claim for direct activities. “Now,” said Tear, “claims can be made for related activities, but HMRC expects the documentation you submit will be thorough and will want to see things like contracts to help it understand that it is for R&D.”
The third main area relates to how information is presented to HMRC. “It’s quite an important aspect,” Tear stressed. “A lot of companies believe that if they write the equivalent of ‘War and Peace’, their claim will be approved. However, HMRC expects you to follow a tight brief, outlining what you think is eligible and why and the relevant dates. So it’s important to outline your claim clearly.”
R&D tax credits are claimed using the CT600 tax return form. “This has space to fill in the amount you’re claiming,” Tear pointed out. “There are also two reports: Table A, which is the descriptive part, and Table B, which covers what you think can be claimed.”
For some companies, R&D tax credits can make the difference between them surviving or not. “It’s the only scheme where you can get money from the Government, even if you haven’t paid anything in. All you need to be is a limited liability company carrying out this type of work,” Tear noted.
“Start ups are often strapped for cash and I know of four or five companies which would have gone out of business without our making a claim on their behalf,” he continued. “It’s what the scheme is for: allowing companies to develop technology and to finance it. And that’s worthwhile.”
GGTC’s R&D tax credit checklist If you can answer yes to any of these questions, there’s a good chance you’ll be eligible. * New product development Do you develop new products or change the way you make them? * Product improvement Do you seek to improve products, materials, processes or devices through technological or scientific change? * Technical challenges Have you faced technical product or process challenges that you have tried to resolve? * Software Do you develop software, IT solutions or products? * Manufacturing and engineering Have you sought to develop or improve your manufacturing or engineering processes? * Efficiency Have you improved or sought to improve your manufacturing process or costs? * Uncertainty When starting a project, have you ever been unsure of how to go about it or uncertain about its success? * Testing and prototypes Do you undertake sampling, testing, trials or develop prototypes or tools? * Services Do you undertake product or process development or improvement services at your own risk? |
