By Kerry Lawrance, Director of Compass Accountants
In April 2015, the rate of relief for small and medium-sized enterprise (SME) businesses claiming Research and Development Tax Credits increased to improve investment and innovation. However, despite these increases, it is estimated that hundreds of thousands of small businesses continue to remain either unaware or uncertain of their eligibility to claim the credits. As a result, R&D tax credits are an untapped benefit for the SME. Consequently, millions of pounds remain unclaimed.
Whilst the larger organisations are reaping the rewards for these credits, the truth of the matter is, the smaller business is either unaware of the opportunity, or oblivious to exactly what can be claimed for.
So, who qualifies?
When people hear the words ‘research and development’, many unfortunately think of onsite laboratories, workers in white coats, or corporate research teams making ground breaking technological advances. However, in reality there are many unexpected industries that businesses can be in to claim, and the credits certainly aren’t limited to frontline innovation. Making any technical change can count as an eligible process, and a business of any size can be eligible to claim.
For example, industries such as food production, cosmetics, electronics, mechanical engineering, IT, transport, materials engineering, architecture, construction, furniture manufacturing, and leisure can all be appropriate industries for the R&D tax claim.
HMRC themselves state that the claim can be made by any company aiming to achieve- ‘an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty’.
So, as long as the project involves a process that fits this description, and sits within the company’s existing trade, (or one the company has plans on diversifying into), then the process can be claimed for.
What counts as R&D?
One of the most common misconceptions -and consequently, the biggest reason for small businesses not claiming- is the false belief that claims must that involve the process of inventing something ‘new’.
Whilst the credit certainly can be used for new developments and patenting products, it is largely used by organisations which are in the process of making improvements or modifications to a process or product. This means that you could be eligible for any process that occurs when your business is attempting to -for example- improve the speed of production, reduce the price of a product, or make it more environmentally friendly- and so, many industries -such as software, agriculture, chemicals, electronics, food processing etc– can then become potential industries the credit may be relevant to.
Solving a customer’s problem, addressing an issue in production, or improving the speed of assembly or manufacturing, using scientific principles, can all count as eligible processes for the claim, whether it is in the company warehouse, out in the field, on even in a home office -on a PC . Here the labour spent, materials used and consumables lost throughout these developments can be claimed for- and these often overlooked elements can lead to a substantial R&D tax return.
Making the claim
Whist the benefits of the tax credits are clearly valuable, many smaller businesses are still put off by the belief that the process of application will be arduous, complicated and lengthy. This also contributes to the reason why many smaller businesses fail to apply.
In actual fact, the process of application can be very simple. Firstly, details of eligible research and development activities must be identified. In the next stage a technical report must be prepared (which can be made by the business itself, or by an accountant specialising in this particular area). The report needs to include full details of the research and development being undertaken together with a detailed assessment of the costs incurred on the project. Here understanding the requirements of the HMRC and preparing a report that will withstand scrutiny is very important.
Once complete, the claim for tax relief is included on the company’s corporation tax return (CT600) and this together with the report can be submitted to HMRC for an inspector to evaluate.
This process can be simplified even further, by approaching an accountancy firm that specialises in compiling technical R&D claim reports. Using the right accountancy firm can also mean that a fee for their services (based on the return you receive from HMRC) can be agreed, and in this case, assessment of eligibility often costs nothing at all. So, businesses really do have little to lose.
The fact of the matter is, failing to make the first step in applying for R&D credits, means you’ll never know if you are eligible, and to what extent - and this could mean your business may be missing out on a substantial amount of money. After making the first step, the process of application is quicker, easier and more rewarding than most small business owners think.