Research and Development – Are you taking advantage?
The R&D scheme is a tremendously generous tax relief which can secure substantial tax repayments, even for loss making companies which have paid no corporation tax. The incentive is designed to encourage innovation and increased spending on R&D activities by companies operating in the UK.
HMRC reports increase in R&D tax relief uptake
Since its introduction in 2000, the government has provided almost £14bn in tax relief under the R&D tax scheme, with the majority of claims being made by SMEs.
Last year alone, businesses received £2.45bn in tax relief for research and development, an increase of £675m on the previous year.
Manufacturing, professional, scientific and technical, and information and communication sectors continued to have the biggest number of claims, making up a total of 75% of claims and 77% of the total amount claimed last year.
The average annual claim for an SME claimant, across the UK, is over £46,000 therefore R&D tax credits can be an incredibly valuable source of funding for many businesses.
How does the R&D scheme work?
R&D has different meanings for different companies, but HMRC have a very clear definition of what constitutes research and development for the purposes of the tax relief. To qualify, a company must meet three important criteria:
- Firstly, the company must be aiming to, or achieving, an advance in technology. A technological advance may simply be making an appreciable technological or scientific improvement to existing product, material, service, device or process. The improvement must be borne out of a technological advancement and not simply a commercial innovation. The simple use of technology would not qualify for R&D relief – the company has to be making an advance.
- Secondly, in making the technological advance, a company must also be overcoming technological uncertainties. Technological uncertainty exists when knowledge of whether something is scientifically or technologically feasible, or how to achieve it in practice, is not readily deducible by a competent professional working in the field.
- Finally, the projects must not be readily deducible by a competent professional. In practice, the easiest way to ensure that this is not the case is the length of time of a project takes to complete. As a general rule, qualifying projects last at least three months. If projects last a shorter period of time, it is likely that insufficient uncertainty existed at the start of the project (and was therefore readily deducible).
Tax saving under the SME Scheme:
Once these costs have been ascertained, the company will receive an additional 130% corporation tax relief. Therefore if a company has spent £1,000,000 on R&D in an accounting period, an additional £1,300,000 CT deduction is allowable (on top of the £1,000,000 already received – giving a total relief figure of £2,300,000). Where a company is paying tax at 20%, this will result in an additional tax saving of £260,000, representing a saving of 26p per £1 of spend.
Where a company is loss making (or where a claim pushes a company from a profitable position into a loss making position), a tax credit of 14.5% can be claimed on the loss which is attributable to the R&D spend.
If you would like to discuss how Prime can help you identify whether you are eligible to receive R&D tax credit, contact us today on 0121 711 2468 / 024 7651 8555.