How many times have you heard the term “digital transformation” being used in your consultancy business? Industry 4.0, or the ongoing automation of traditional industrial practices using smart technology, is in full swing, yet some businesses are still struggling to catch up. The impact of the Internet of Things (IoT) and machine-to-machine communication is the future of business, and professional consultancies are in the thick of it.
This same digitisation and increased competition is transforming the professional services and consultancy industry. As these businesses help their own clients to harness disruptive trends, they must keep their own operations at the forefront of future thinking to maintain their edge.
How much resource has your company put into developing automation for operational efficiency? What spend have you put into workflow modelling and productivity tools? Have you invested in business intelligence and data analytics lately, or moved your operations to the cloud? Are you needing to develop new ways of working to deal with regulatory impacts in finance, environmental or trade laws?
All of this could be considered innovation in professional services and consultancy – and for companies operating in the UK, that innovation means they may have access to tax relief from the UK government.
What are R&D tax credits and who qualifies for them?
The R&D tax relief scheme was introduced by the UK government in 2000 to reward UK businesses for investing in innovation. More than 300,000 claims have been made since the launch of the R&D tax credits scheme, representing a total of more than £33.3 billion in tax relief which could then be reinvested into more innovation.
HMRC provides tax relief to those undergoing innovation and development as part of their business. This relief is known as the R&D tax credits scheme, and it’s accessible to all businesses registered in the UK. In this article, we are focusing on the small or medium sized enterprise (SME) scheme, though HMRC also offers a research and development expenditure credits (RDEC) scheme for larger businesses.
Under the HMRC R&D tax credits Scheme, you can claim different sorts of expenditure, as long as it’s been spent in pursuit of innovation. This includes:
- Staff costs, apportioned for the time spent on the R&D project
- Software costs, apportioned for any subsequent use
- Up to 65 percent of what you pay your R&D subcontractors
- Any utilities and consumables, such as water, fuel and power, used in the R&D project
- Any prototypes produced for R&D purposes
However, there is no single definition for what qualifies as innovation or what falls under applicable R&D activities under the R&D tax credits scheme, which makes it tricky for SME business owners to understand how to access this tax relief.
What activity can qualify for R&D tax credits in the professional services sector?
Activities within the professional sector that could qualify for R&D tax credits include:
- Development of new FinTech solutions
- Data research into cyber security, blockchain and AI technologies
- Implementing a customer relationship management (CRM) or contact centre system
- Integrating disparate sources of technical or other real world data
- Data analytics, such as combining data sets and using algorithms to create derivatives
- Improving safety or compliance with new regulations
- Solving technical problems that arise during or after the project specification is set
- Using science or technology to improve user experience
- Achieving significant performance improvements to service delivery processes
- Development of a front-end website portal or office management system
- Development of a back-end portal to interface between segmented parties
- Creation of bespoke APIs to enable data transfer between multiple platforms
- Alteration of existing commercial models and skill sets
These innovations don’t need to be revolutionary, but the SME claiming the tax relief should demonstrate some level of technical uncertainty in the work undertaken: if you know for sure it will work, it’s unlikely to be considered true research and development for tax relief purposes.
Why don’t more businesses claim this tax relief?
This all sounds great, right – so why don’t more of the UK’s small and medium-sized enterprises claim R&D tax credits from HMRC?
HMRC designates this sector as “Professional, Scientific and Technical”, and it made up 19 percent of all R&D tax credits claims in 2018-19, yet many of the sector’s SMEs are missing out on the benefits for various reasons.
Put simply, the under-utilisation comes down to three main factors: knowledge, ambiguity and resources.
Issue one: They don’t know it exists
Unless a business is on the cutting edge of its field, it may not consider its general development to be innovation – it’s just part of moving the business with the times and remaining viable in the market. The company’s accountants may not make them aware of the scheme, either. Sometimes an SME leader discovers the R&D tax credits scheme accidentally when researching new funding streams for the business.
Issue two: They don’t think their activities would qualify
Those magic letters R and D conjure images of people in white lab coats pushing for the latest discoveries in scientific endeavour, but most sectors and businesses have access to innovation. When it comes to what qualifies for R&D tax credits, HMRC has deliberately left the definition vague, and this in turn means many SMEs shy away from thinking the tax relief scheme is open to them.
Issue three: They don’t have the time to invest in the complicated application process
Finally, if an SME finds out about the R&D tax credits scheme and believes they qualify for the tax relief, they can be put off by the complicated application process. It takes time and research to identify exactly which projects can be classed as R&D for tax relief purposes, and figuring out which costs within those projects are eligible. Any misunderstanding or application issue could result in wasted effort, and no tax credit.
Where can you go from here?
These challenges are easily surmountable, though, if you consult with an independent expert in R&D tax credits. Working with such a partner can maximise your chances of a successful R&D tax credit claim.
Easy R&D is fully focused on R&D tax relief. Our diverse team of technical experts works in partnership with business leaders looking to claim R&D tax relief from HMRC. We carry out the majority of the claim process, keeping client commitment to a minimum and maximising the claim value that can be received.
Our easy five-step process to R&D tax credits claims helps our clients to focus on what’s most important: growing their business.
Get in touch with our team for a free consultation and find out how you can claim R&D tax relief for your professional consultancy business.
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