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R & D (Research and Development) Tax Credits - Advice for SME's September 2015

 

Research and Development Tax Credits'The Lord giveth, and the Lord taketh away' (Job 1.21) - and so it is with HMRC. Most SME's have the feeling that HMRC are adept at the 'taketh away' bit and less practiced at 'giveth'. We receive very little education in either department. R&D tax credits are a prime example! Do make sure you're not missing out!

The Background 

The UK Government introduced R&D tax credits for SME's in 2000. A further (but less generous) scheme for large companies was launched in 2002. This was part of a larger programme designed to make the UK a highly attractive place to set up new and innovative businesses. 

There are  common misconceptions amongst both businesses and their accountants about what constitutes qualifying expenditure on R&D. The government has made £1.5 billion per annum available to companies undertaking R&D activities, but only around 0.5% of companies who are eligible to claim the credits have applied. Of the £10 billion allocated to R&D since 2000, only £1.5 billion has been claimed. Another best kept secret.

Who will find this information worth reading?

  • Businesses which are limited companies, have been trading for over one year and can answer 'yes' to one or more of the following questions.

    • Have you made any bespoke products or customised bespoke products?
    • Have you developed any new products or been involved in introducing them?
    • Have you carried out design work in-house or sub-contracted design?
    • Are you regularly problem-solving for customers' needs?
    • Have you made any environmental improvements to your process?
    • Have you consistently made improvements to your manufacturing processes?
    • Have you developed or improved any software for your business?

If the answer to any of the above questions is 'yes' then it may be worth finding out more. What is even more intriguing is that the R&D does not necessarily need to have been successful. You can claim for cost expenditure on developing prototype products or systems. The aim is to reward innovations which (logically) are not always successful first time round!

  • Businesses which may provide subcontracted services which might constitute R&D activities (for example software development and engineering services) to other companies. It is the 'other companies' (i.e. your customer) who may be able to claim back credits for the sub-contracted work.

    • Having a greater understanding of what constitute qualifying activities could well reduce the end cost of your services to your clients. For example one company has recently claimed back £74,000+ for improvements to a CRM system - which doesn't immediately spring to mind as an 'R&D' activity!

    • Even if you understand R&D tax credits, don't assume that your customers do. If you are writing proposals for work for which customers might claim full tax relief, then be sure to let them know. If you don't, savvy competitors may well use this weapon. After all, if you can reduce the price of your proposal (to nil in some cases) why would you not do so?

 

  • Any business person who is an advisor to other businesses with regard to finances or business development.

    • Even though we may be advising in a completely different area of expertise, it helps if we bring our own crust with us! Since this appears to be an HMRC initiative which is very well-hidden we are beholden as SME citizens to raise awareness.

 

Isn't it an accountant's job take care of this?

Yes, sort of - but...accountants tend to be responsible for what they choose to be responsible. A sweeping statement - but there are so many convoluted tax benefits (and payments) that you shouldn't anticipate that yer average high street general practitioner accountant will be au fait with them all. Nor do all accountants understand their clients' business operations well enough to guarantee that they will pick up this opportunity on your behalf.

Most large accountancy firms may well have someone dedicated to this speciality area, but most will refer the work outside to a specialist firm since this is the most cost-effective way of delivering the service. Better to pay an expert than pay similar fees to someone who is not expert!

It isn't really the accountants' faults - HMRC has been 'promising' to provide more education regarding R&D tax credits for several years, but by their own admission are currently only working with 'specialists' in the field. They certainly don't make it straightforward to claim - particularly for small businesses.

How are R&D tax credits paid?

The credits are paid by tax relief on corporation tax - hence the requirement to be a limited company. For every £100 of eligible R&D costs, the income on which a company pays corporation tax will be reduced by £225 pounds. The original £100 + £125 additional relief. In some cases this results not just in a reduction of corporation tax, but a payable credit.

What can you do if you think you are eligible to claim R&D tax credits?

It's worth doing a bit of research about R&D Tax Credits. Here are some useful links:

 

Next - understand what your options might be:

 

  • Ask your accountant about R&D tax credits. Have they ever attempted to make a claim for a client? Have they had any success in claiming for a client? How did they charge for making the claim on their client's behalf? Most accountants who don't have sufficient knowledge of R&D tax credits will tell you so. If you receive a woolly answer, or are told that R&D is too complicated/risky on principal, then you can go direct to a specialist claim company or ask another accountant (who does handle specialist claims) to do a 'one off' piece of work for you.

 

  • If the accountant says straight 'no' to knowledge of R&D tax credits?

 

  • Many accountants will have a specialist R&D claim organisation whom they will call on to handle a potential claim on your behalf. It is worth asking for how this service will be charged, and whether it will be done on a 'no win, no fee' basis. This minimises the risk to your funds, but the percentage retained when a claim is successful may differ.Typically the retention of reclaimed tax equates to 20 - 30%. The work involved is complex (for the claim company, not for you) and they take on all the risk of failure, so best way to think of this is 20% or 30% of 0 (which is what you'll get if you don't try!) is 0.
  • If your accountant says 'no' and does not offer to introduce you to a specialist company there is nothing to stop you going direct to such a specialist claim company. Or you may be able to find a local accountants' firm who does claims - but not on a 'no win. no fee' basis.
  • If the accountant says 'yes' to knowledge of R&D tax credits?

 

  • As mentioned above, check the accountant's credentials for handling your claim. Are they intending to outsource? What will the remuneration for the service be? Will they work on a 'no win, no fee' basis if they are going to undertake the work themselves? Make sure you get a quote and not an 'estimate'. If you are prepared to lose the fee in the event of a failure, and the amount constitutes less than a specialist claim company will charge in the event of failure, then this may be an option for you. Accountants don't generally risk their reputation by taking on work for which they aren't qualified! But don't be afraid to outsource if you think the fees are too steep, or if the accountant intends to keep a proportion of the claim fee for themselves.

 

  •  What if you haven't made sufficient profit to pay corporation tax?
    • The guides explain that in the event that you have ploughed funds into your business and don't anticipate making a profit, or have made a loss, you can still claim for R&D tax credits. It will come back to you in the form of a cash refund rather than an amount being deducted off your corporation tax.

 

  • Subsequent years
    • Costs for reclaiming R&D may well reduce in future years, and may differ depending on who you use to make your claim. Don't forget to ask what the anticipated costs will be!

 

If you would like to book a no obligation audit with R&D Tax Solutions, then follow this link

 

gillbray@businesshat.co.uk or phone on 07725 806010.

 

 

 

 

 

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