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How Many Businesses are Missing R&D Tax Relief?

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.

Conclusion

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.

Contact us

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.

How R&D Tax Relief Can Cut Your Costs

For many businesses, a constant job is to look for ways to reduce taxes without overstepping boundaries or breaking rules.  The old advert that HMRC ran about ‘tax doesn’t have to be taxing’ is a bit of a laugh for most businesses – or a grimace.  Yet there are ways to reduce how much tax the business pays and also schemes that can get a business a tax credit.  One of those is the R&D tax relief system.

Basics ways to cut tax

As a rule, any cost that is ‘wholly and exclusively’ due to your business can be deducted as expenses from your income and therefore, reduces down how much tax you have to pay.  This can be a little more complicated where business and personal expenses are all wrapped up together so records need to be kept.

For example, if a work from home freelancer uses the landline 50% of the time for business calls and the rest for personal, they can only claim for half of the cost of the phone line rental and the cost of calls that are relating to the business.  Similarly, a car used for both private and business use can be claimed for to the degree that it is used for business – say this is one third of all journeys so 33% of costs can go down for the business.

There are lots of other ways to look at how to reduce taxable income within the rules.  Stationary, postage, costs of meals and drinks while away from home on business and even some entertainment costs can be included legitimately, though paperwork to support everything should be collected and kept for six years after the accounting period.

Capital expenditure

Another way to reduce how much tax you need to pay is for items bought for the business, which are called capital expenditure.  There are many examples depending on the nature of the business but these could be things like computers, office equipment and even the cost of buying a business premises.

If you are a window cleaner and buy ladders, racks for the van to carry the ladders and other equipment such as buckets and cleaning gear, this will all count as capital expenditure.  Basically, it is anything that the business needs but that isn’t bought on a regular basis.

R&D Tax Relief

One of the big ways that businesses can reduce their tax bill is through the R&D Tax Relief system but many companies don’t realise it exists or don’t think it could apply to them.  The system is part of the Corporation Tax system and offers tax relief for businesses conducting research and development in areas of technology or scientific area.

But how do you know if the work your business is doing counts as research and development?  For starters, the work must be within the company’s trade, either an existing one or an area that will be started as a result of the research work.  It must be:

  • A project that advances science or technology
  • Must contribute directly to existing knowledge
  • Or solve a current scientific or technological uncertainty

To qualify as scientific, it must not be in the arts, humanities or social sciences and must be more than just commercially innovative.  If it is solving an existing uncertainty, it must look at whether something is feasible, how to achieve it in practice or work on something that isn’t already available.  It must also be easy for a non-expert to see how the uncertainty has been solved or knowledge on the topic improved by the work.

How much is the tax relief worth?

There are two different tiers for the payment of the tax relief – small and medium enterprises (SMEs) and large enterprises.

An SME is a company with less than 500 employees and either an annual turnover less than €100 million or a balance sheet less than €86 million.  It is a little different from the definition under other areas such as for Corporation Tax or by HMRC.  Companies who exceed these limits are classed as large enterprises – Easy R&D focus on the R&D tax credit SME scheme.

For small and medium sized businesses, the tax relief for research and development is 33% of R&D qualifying costs, or a loss can be surrendered at a rate of 14.5%.

What can it be claimed for?

Like normal tax deductible expenses, there are things that the business can claim for under the scheme and others that they can’t.  For example, the cost of staff wages for those working on the R&D project can be claimed as long as they aren’t consultants, agency workers or people who have a contract with someone else.  There are some subcontractors that can qualify.

Materials can also be claimed for, providing they are used for the project even if they are consumed but don’t include things such as data or telecommunications costs.  Utilities such as power, water and fuel used directly for the work can be claimed for as can computer software used on the project.

While capital expenditure would cover investments made for the business, there are also some areas where you can claim R&D capital allowances for some purchases made for the project.

Conclusion

While it may sound complicated, the R&D Tax Relief can be simplified by using the services of an expert in claiming these credits.  This can result in the business receiving a large and very useful credit or even payment towards the cost of work they are doing and may allow the business to continue to develop or research something going forward.

Contact us

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 – 0800 195 7516.

How Can Companies Apply for R&D Tax Credits?

One of the aims of the government in recent years has been to make the UK a place of innovation and development.  To help inspire companies to do this or to help with costs of such research, they introduced a system of business tax credits.  Many companies don’t claim this credit because they think it doesn’t apply to them – but they may be wrong and apply for this R&D tax relief is a relatively simple process once you know you qualify.

R&D tax credits explained

The research and development (R&D) tax credits are a way that the government helps businesses that are involved in developing new technology or working on new scientific breakthroughs using the tax system.  For businesses that make use of the system, research shows that around 80% of them found themselves in a better financial position for having done the work – able to hire new staff, continue with research and even enter into new business areas.

R&D tax credits for small and medium enterprises

For businesses with less than 500 staff and a turnover of either less than €100 million or €86 million gross income, the SME’s tax credit applies.  In this, a business can claim back up to 33% spent on research and development, regardless whether the business is making a profit or not.

In 2017, businesses that did make a claim through the system saw an average return of around £60,000.

What qualifies under the R&D tax credits scheme?

The reason that many businesses don’t claim under the scheme is that they are unsure if the work that they are doing could qualify under the scheme.  This leads to uncertainty and the decision that time spent trying to claim could be better spent elsewhere.  However, there is a surprisingly large amount of research that can fall under the R&D tax relief system.

The basic qualification is that the work is taking a risk to ‘resolve scientific or technological uncertainties’.  This means that if the business is creating new products, process or services, then it may be eligible.  It could also be the case if the business is changing or modifying an existing process, product or service.  And the most important fact is that the research doesn’t have to be a success to make a claim – failed projects contribute to knowledge and are also eligible.

Examples that have already been accepted by HMRC and the tax credits given to the business include:

  • Translation software
  • iPad and iPhone applications
  • Bespoke time recording systems that incorporated billing
  • New web-based customer relationship management systems (CRM)
  • Dedicated software apps for sub-contractors

The project needs to have a clear start and end date and must involve a process over a period of time rather than a spur of the moment discovery.

What R&D tax relief can businesses claim for?

If a business thinks that the work it is doing might qualify, then how exactly does it work out what it can claim for?  Again, there is clear guidance as to what can and cannot be claimed for under the scheme.

You can claim for the costs of staff working on the project, based around the time they spend on it.  These can be gross of salaries, national insurance contributions and pension contributions but the person must have the right background for the project.  There are some situations where businesses can claim for subcontracted work but it is limited to 65% of costs and there are other rules apply.

Software that is specifically for the project can be included in the claim along with items and materials used or consumed during the research.  This includes things such as heat, light and power but only used in connection with the project, not for the larger business.

Getting help to make an R&D tax relief claim

A further step to ensure businesses claim what they are due is the development of services such as those offered by Easy R&D.  This enables businesses to go through a process to discover if they qualify for the tax credits and if so, quickly and easily submit the documentation.  Many businesses using the service get the money due to them within six weeks and this can greatly help the continued success of the company.

The system will involve asking a number of questions about the nature of the research such as:

  • Is it in a field of science or technology?
  • Is the work improving what is currently available?
  • Is it a scientific or technological advancement?
  • Is it working on a current uncertainty?
  • Are you investigating and testing results?

Once it has been ascertained that the work will qualify under the system, the information can be gathered to support the costs involved.  This can then be submitted through the relevant part of the T&D tax credits system to get the business the money that it is due or the credit against the following year’s tax if this is the case.

Conclusion

Research and development is crucial to expand our knowledge of all things and the government’s system rewards those involved in it.  Finding out if your business’s work qualifies is now easier than ever and there’s no reason why every qualifying business cannot get the money that the government has set aside for the, allowing them to continue the work into the future and also make a profit.

Contact us

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 – 0800 195 7516