Most of us will admit to complaining about the amount of tax we pay, whether personally or through our business. Yet a number of businesses are missing out on research & development tax relief that could reduce the amount of tax they have to pay or even see them get a credit back to their business. So why don’t businesses claim for this tax relief and who is entitled to do so?
What is the HMRC R&D Tax credit system?
The HMRC R&D Tax Credit system was established back in 2000 and has been amended some since then but is essentially a way to encourage businesses to get involved with research and development with the promise of a tax credit. This means that businesses can embark on projects and, whether successful or not, can claim money back from HMRC for these efforts. However, there are a few stipulations to ensure the work is genuinely research and development.
There are currently two levels to the system – those for small and medium sized enterprises or SMEs and those for large companies. The basics of the system means that if a business is conducting research to advance the overall knowledge or capability of a field in science and technology through the resolution of uncertainty, then they can quality for HMRC R&D tax relief. This can also take the form of R&D tax credits HMRC pay back to the business in the even that tax isn’t sufficient to have the amount deducted.
How to qualify for R&D tax credits
For starters, the research must relate to the company’s trade, through this can be a new area that the business is research to then expand into. The guidelines state that the project can be classed as research and development if it is a project that either creates a scientific or technological advance or clears an uncertainty from a previous project which can have been carried out by another business or researcher.
To qualify as science, a project must not involve work in the arts, social sciences including economics or humanities. The project must not just be commercially innovative and must incorporate either a scientific or technological aspect. It can also be to test if something is scientifically or technologically feasible.
How much is the R&D tax credit worth?
For SMEs with an annual turnover of under €100 million or a balance sheet of under €86 million, then the tax relief rate on qualifying R&D costs is 33%. If the company makes a loss, then the tax credit can be surrendered at a rate of 14.5%.
How many businesses are missing out on R&D tax credits?
Figures published regarding research and development for the year 2016-17 showed that there were around 45,045 claims for HMRC R&D tax credits SME scheme. For 2017-2018 the total number of claims for R&D tax credits SME scheme was 42,075. But does this mean that lots of businesses are missing out?
According to the Department for Business Innovation and Skills (BIS), there were around 6 million private businesses in the UK in 2017 but 75% of these did not have any employees other than the owner. These single person businesses are much less likely to be able to get involved with research and development for logistical reasons. So, that leaves over 1.5 million businesses that potentially could undertake R&D. Not all of these businesses are in a position or an industry to involve themselves with R&D under the government qualification. So let’s estimate 10% of this figure might be able to claim – that’s around 150,000 businesses. Yet only 45,045 of these did.
Why don’t businesses claim R&D tax credits?
There are two main reasons why businesses don’t claim for possible R&D tax credits. The first one is that they are unaware of the scheme. For all it has been around since 2000, many businesses don’t realise that the work they do could qualify as research and development. R&D is typically seen as something that universities or massive international companies do yet even small and medium sized enterprises can qualify for it depending on their work.
The other main reason is that they are aware of the scheme but simply don’t think that they qualify. They think the work they are doing is just part of their normal routines and that it is helping to make the business a success. While this is true, if they qualify under the scheme, then they can be rewards two-fold for the work – with the advancement for the business and with the tax credit from HMRC.
Examples of projects that might be classed as day to day but could qualify for R&D tax credits include:
- Automating an internal process with a new development
- Creating new, improved or more reliable products or processes
- Creating prototypes or new models of existing products
- Trying new materials or working with them in new ways
- Development in software or new systems
- Creating bespoke niche solutions for clients in different industries
Finally, there is a third reason that businesses don’t claim for the tax credits that they are due – they think the process is too complicated or fear something goes wrong and there is a negative effect on the business. However, there are now companies that offer their services to help claim for the R&D tax credits or relief the business is entitled to and makes the process simple and very cost effective.
There’s lots of help and advice available to assist with claiming for R&D tax relief and many businesses are engaged in this kind of work without even thinking about it. So, if your business may qualify, seek out some help to ensure you aren’t missing out on free money from HMRC – not something that happens every day.
Easy R&D have helped hundreds of companies to make R&D tax relief claims. Contact your nearest R&D Consultant to see if you can claim on 0800 195 7516.