R&D Tax Credits Explained
What are R&D Tax Credits?
The R&D tax credit scheme is an HM Revenue & Customs (HMRC) initiative, designed to encourage innovation by companies operating in the UK.
The Government is keen to make the UK an attractive place to innovate and thus the incentives for companies to develop new and existing products, processes and services have continued to improve.
However claiming R&D Tax Credits is a significant challenge because innovation and technology move along at such a rapid rate that today’s R&D quickly becomes tomorrow’s routine development and it is important to be specific and decisive about claiming.
And whilst HMRC wants to encourage UK companies to innovate, there can be a fine line (and yet a world of difference) between genuine tax breaks that encourage innovation, versus hand-outs to any organisations that may claim to be ‘developing products and services’.
Yet the financial benefits of successfully submitting R&D Tax Credit claims are substantial and easy to quantify; hence it makes sense for companies to engage with R&D Tax Credit specialists in order to ensure that their claims are successful.
HMRC have published an easy to read summary of the scheme which is available here.
Why Easy R&D?
The traditional approach to claiming has typically been to engage with a specialist organisation, meet face to face and work collaboratively to submit a claim to HMRC.
All good so far, except that:
- This is not usually the most efficient or effective use of everyone’s time;
- With development timescales to meet and client SLAs to consider it is not always possible for a claimant’s representatives to commit to meeting at a place and a time without the likelihood of last-minute changes, or worse still, non-productive meetings or outcomes;
- Given that technical input is often required from several members of the development team, ensuring that these people are all available at a given time provides a further challenge;
- Although often well-deserved, the specialist R&D Tax Credit companies are doing extremely well out of the fees that they are charging;
- Finally we discovered, almost by accident, that many clients preferred a more ‘hands-off’ approach anyway, allowing them to do things in their own time and at their own pace;
Hence at Easy R&D we decided to come up with a fresh approach that provides a better solution for everyone.
Who can Qualify?
Any limited company (i.e. any company that may normally be liable for corporation tax) whose employees or subcontractors are undertaking the development of products or services, with at least a degree of technological uncertainty or unpredictability, should be eligible for this scheme.
What could this be worth?
HMRC will allow up to 130% additional tax relief on all ‘R&D expenditure’; hence any company spending £200K in R&D for example would be able to claim this as £460K of expenditure for the purposes of their corporation tax calculation.
Therefore, using this example a company that pays corporation tax at a rate of 20% would not only be able to offset the £200K actually spent against any corporation tax payable (for a tax saving of £40K), they would be able to offset an additional £250K (for an additional tax saving of £50K) by claiming under this scheme.
The relief can be reclaimed for the previous two complete financial years and under this scheme even loss making companies can surrender losses for payable Tax Credits, which could be very important in start-up situations for example, where cash is extremely tight.