12 August 2015 09:45
Why even accountants find R&D tax credits too complicated
For generations, the UK has justifiably been recognised as a hothouse for technological innovation and a big part of that is down to firms' investment in research and development.
Successive governments seek to demonstrate their commitment to continuing this tradition, and one initiative that is proven to work is a tax credits incentive for R&D, that can result in either a reduction of tax or a cash repayment, of up to 33% of expenditure on eligible activities.
Unfortunately the current scheme is a complex affair with hundreds of pages of legislation. Many accountants, in-house and external, if not sufficiently experienced in R&D claims, may find it difficult to identify whether their clients have a justifiable claim or know how much can be claimed. And they may not have the confidence or wherewithal to defend it successfully if the claim is challenged by HMRC. It comes as no surprise then that many businesses that have substantial research and development arms now look to specialist advisory firms for advice they can rely on.
Here's the lowdown on R&D tax credits…
The amount that can be claimed back depends on the size of a business and whether it is profitable or loss making. Let's assume you operate an SME. Currently, if you're making a profit, you can claim a super deduction from your taxable income of 230% in qualifying R&D expenditure, while if you're currently running a loss-making enterprise you can then surrender that enhanced deduction for tax credits at a rate of 14.5% for losses, equating to about 33 pence in the pound.
A typical claimant can receive upwards of £46,000 every year, and you normally go back two years. So far, straightforward enough. Yet many businesses that are eligible – most, in fact – are not submitting claims. Why not?
HMRC guidance stipulates that to qualify for tax relief, a project "must seek to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty".
While this makes it sound as though your business needs to be stepping into unknown territory, boldly going forth like the Starship Enterprise, in reality most R&D happens as part of normal product development. And while it's nice to be the only one in the industry working on something, many companies in the same industry can be working on the same thing simultaneously and it's still R&D for them. So many companies are left wondering if their advances and uncertainties apply to the industry as a whole, and therefore if the work qualifies.
If your business is considering an R&D project, it makes sense to begin with tax relief at the front of your mind, and potentially structuring the project to maximise this advantage. From an accountant's perspective, they typically ask whether the project is "highly innovative" (which it may be commercially but not necessarily technologically, or vice versa), whether it is pushing the boundaries of science or other unhelpful questions, whereas the actual criteria are much broader than that.
There is another, even greyer area, which may be the biggest reason so many businesses fail to claim for relief. That is that eligible R&D-associated costs can be broad, often stretching across a company's entire operations, and certainly not restricted to just the R&D department.
Let's say that your product development has 20 software developers or engineers working on a project. Allowable costs will include the relevant part of their salaries of course, for those 20 staff members – something that is often not easy to determine, as well as consumables such as materials used in testing. There will also be a proportion of utilities that can be claimed. But what about the time spent by senior management in coordinating the project?
What about the product managers or implementation team who liaise with live customers to test the product in a real-world environment? What about the hours spent tallying up the various costs involved with the project or recruiting new engineers? These indirect business costs can in certain circumstances all legitimately be claimed for, and could add up to thousands proportionally.
That's why if your business has a significant project on the horizon, be it a submersible smartwatch or anything else, it's a good move to consult a specialist in claiming tax relief for R&D before moving any further forward.
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