We tend to think of taxes as a necessary evil, but in fact taxation can be a two way street with lucrative (and legitimate) tax refunds available to businesses if they know where to look and how to go about claiming them. One such tax credit, sometimes overlooked by SMEs, is in the area of research and development (R&D). In fact, an estimated 40% of British companies who are entitled to claim an R&D credit don’t – meaning that they lose out on an average refund of £35,000 (tax free) every year.
As a way of supporting British businesses, the amount of tax relief for R&D activities was increased to a maximum of 225% against Corporation Tax in the last Budget. However, the rules on claiming R&D tax credit are often complex, which means that businesses don’t always realise that they are eligible, or are deterred by the application process. Whilst R&D certainly isn’t money for nothing – many organisations invest considerable time and expense in research and development activities – it is money that many organisations are legitimately entitled to, for a whole range of reasons.
The question of eligibility
When considering research and development, most people think of men in white coats poring over microscopes or making new discoveries. However, under HM Revenue and government guidelines, many companies in all types of industry can qualify for this financial incentive. For example, our practice has successfully made claims for clients in disciplines ranging from engineering through to software, and including healthcare, insurance, packaging, injection moulding and even cheese-making, to name but a few.
So what are the rules to qualify for a research and development tax credit? The basic requirements are as follows:-
(a) The work, project or new idea must seek to achieve an advance in the field of technology or science.
(b) To conduct a project that requires the company to extend overall knowledge or capability in a field of science or technology.
(c) To create a process, material, device, product or service that incorporates or represents an increase in a field of science or technology.
(d) To make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes.
(e) To use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way. For example, a product which has exactly the same performance characteristics as existing models, but has been built in a fundamentally improved manner.
To claim R&D tax credits the company is not required to tick all the boxes listed – just one. Furthermore, claims can be made two years back from the next financial year end.
Calculating the cost
Costs incurred in the company’s research and development are chargeable. It’s also worth remembering that a company has already had the tax allowances for these costs through the profit and loss account – this is an additional benefit.
Examples of costs chargeable include (amongst others):
• staff costs
• subcontractor costs
• heat, light and power
• computer costs
As an example, let’s say the company spent £100,000 on R&D (it’s surprising how quickly the costs add up). Dependent on the year in question, the company can enhance the £100,000 by either 75%, 100% or 125%, and move the enhanced R&D figure to the Corporate Tax computation under a revised submission to create one of the following benefits:-
(a) Reduce the Corporation Tax due or paid (if already paid receive a refund with interest).
(b) Create a surrenderable tax loss, which can be either carried forward or handed to the government for cash, dependent on the year at the rate of 14%, 12.5% or 11%.
One final benefit to the company in a loss position is that they can surrender the tax loss created by the research and development enhancement (in our example £100,000), and add to it from the company’s loss in the year (a further £100,000); hand this to the government and receive cash. Just remember, once the losses are surrendered they are no longer available for future use and all R&D tax credit emoluments are tax free.
Help from the experts
In my experience, many organisations are either daunted by the process or lack the time and/or knowledge to put together a successful application, which is where companies like R&T Consultants can help. We not only advise companies and carry out applications, but we also run seminars in conjunction with HM Revenue & Customs and research and development units to help spread the word about this valuable financial incentive.
In the current economic climate, no company can afford to waste money – or fail to claim what is rightfully theirs. I would urge any SME that has yet to investigate the potential of research and development tax credits to do so as the benefits can be considerable, enabling the company to re-invest funds to ensure future growth – and sometimes making the critical difference between profit and loss.