06 May 2016

Making Tax work for your Business

Sam Stephens
Director

Whether it is about inventing new products, carrying out ground-breaking research or developing and improving new industrial processes, the future of any business depends heavily on the quality and sustainability of its investments in innovation. Sam Stephens, managing director of TBAT Innovation takes a look at the part R&D Tax Credits play in realising business growth through re-investment of cash.

Derbyshire-based Medstrom designs and manufactures bespoke healthcare equipment used in NHS hospitals to assist with moving and handling, skin management, infection control, and patient falls as well as managing assets on behalf of many NHS trusts. When the company approached TBAT Innovation with a new project, it was evident that previous project costs such as salaries and materials would make them eligible for an R&D Tax Credit, going back three financial years. Whilst the product development aspects of the company generated a very robust R&D claim, TBAT identified an even larger opportunity with the 3 year development project for Medstrom’s asset tracking structure. This increased the original claim by 150%. Preparing the credit report and submitting the financial claim to HMRC was relatively straightforward, and by maximising the claim, Medstrom was able to release vital funding for future R&D, thus fueling growth.

However, despite the scope of the Science and Technology Research and Development Tax Credits (R&D Tax Credits), a large proportion of eligible companies either don’t know about or have been misinformed about this relief. You do not have to be inventing something or getting a patent. It is available to, and most typically used by, companies that are improving or modifying an existing product or improving a manufacturing process; that is, making a product cleaner, quicker, greener, cheaper, etc. HMRC look at whether the work is seeking to achieve an advance in science or technology, if it is subject to scientific or technological uncertainty and is being conducted in a systematic and thorough fashion. So, computer software, architecture, engineering, etc. are all good candidates for the R&D tax credit.

Who Qualifies?

A common misconception is that the relief is only for big companies. The reality is that the majority of innovation now takes place in small and medium-sized enterprises who are precisely the companies who should be applying. Research and development tax credits cost the exchequer around £1.1 billion a year. However, in the past 5 years almost £2 billion of unclaimed R&D tax credits have been left at the table.

Since 2000/01, more than 20,000 companies have claimed enhanced tax relief using the R&D tax scheme with a total tax cost approaching £5 billion, based on R&D investment by companies totaling £52 billion over the initial 9 year period. But this is less than 1% of the companies registered at Companies House.

The Government estimates that they will provide an additional £130m of extra funding per annum by 2018/19. Currently around 800 science and technology companies benefit from this credit and this is anticipated to increase following the 2014 budget measures.
The political will behind the R&D Tax Credit scheme is strong. Industry and politicians agree that increased investment in technology and innovation is key to the continued growth of the UK economy because it makes more cash available within the business to fuel further investment in innovation.

For example, TBAT were referred into Xibis Ltd, a specialist web application development company, for assistance claiming R&D tax credits on work already carried out. Xibis had extensive experience in building bespoke solutions, mobile commerce and e-recruitment. Their projects involved conceptualising, planning, meticulous code development and testing. Xibis had previously been advised that R&D tax credits were not worth applying for, and were surprised when TBAT’s initial calculations based on their most relevant projects countered this. Xibis had actually conducted high level of research and development during the two year claim period, and in order to continue creating innovative products and remain competitive it needed increased funds. By claiming a cash refund from HMRC, Xibis were able to reinvest this to further improve their service offering.

Eligible costs

The definitions of eligible R&D and eligible costs are reasonably broad, and eligible R&D activities often take place across the whole range of company operations. A careful audit of a specific R&D project, as in the case of the digital software company, should identify the costs of staff engaged in the research, consumable materials, software, and subcontractors’ expenses.

Not all of a company’s activity has to qualify for that company to file for R&D Tax Credits. In fact, it is almost impossible for all of a company’s work to qualify. So long as some of the work is complex and challenging, there’s a good chance that a portion or even a majority of the costs will qualify. What is “complex and challenging”? Well, the answer to that is “it depends”. As a rule of thumb, if it was not entirely obvious to a moderately competent programmer/technologist/developer what the solution would look like, in detail, before it was established, then it probably qualifies.

How much can I recover?

  • If you are profitable you can off-set up to 26% of your development costs against your corporation tax bill.
  • For loss making SMEs – a payable credit of up to £32 for every £100 of qualifying expenditure can be recovered.
  • Some SME’s may choose to use the R&D tax credit to extend their losses, so when they move into profit it saves paying tax which can be as high as 26% of their R&D costs.
  • For large companies for every £1 spent on R&D, the company’s tax bill can be reduced by 7p

Grants

Depending on the type of grant you might have received, say £100,000, against a total project cost of £500,000 of qualifying R&D expenditure, your company could claim a deduction of 225% on £400,000 of the costs under the current SME tax regime. However, the remaining £100,000 may qualify for the large company incentives where the tax relief on allowable R&D costs is 130%.
If you find a specialist to help you file a claim for R&D tax relief they should be able to help you:

  • Identify your eligible R&D projects – historic, current and future
  • Determine the expenditure incurred on your qualifying activities
  • Optimise the value of your R&D Tax Credit
  • Draft the supporting documentation (financial and technical reports)
  • Work with you to finally submit the claim & liaise with HMRC

Concluding Thoughts

I have been working on R&D Tax Credits with companies of all sizes since 2011. It became apparent to me that clients were consistently misinformed about this relief by their accountants, or simply did not apply in the belief that only companies with laboratories and staff in white coats could claim. Perhaps this is a failure of marketing by HMRC, or a common misunderstanding of the words research and development. There are numerous examples of companies, like Medstrom and Xibis, who have used UK tax law to their advantage. Like them, your company may be entitled to a proportion of the estimated £2 billion unclaimed R&D Tax Credits. Over the last five years, TBAT Innovation has successfully claimed back approximately £7.5 M for a range of industry sectors from medical to marine, and in disciplines from software to manufacturing. The time and effort is worth every penny back into further research. I’ll leave the last words on the contribution these tax credits provide to private investor Paul Jenkinson who says ‘the measure of an entrepreneur is their ability to marshal every conceivable resource to move the company forward. As an investor, I’m looking for this kind of planned cash management, and if the busy owner-manager seeks expert advice, so much the better.

These tax credits are just what ambitious science and technology companies need, to free up more cash for business growth and further investment’.

Related Articles

06 May 2022

R&D PAYE Cap – SME Scheme R&D Tax Credits Claims

The HMRC PAYE Cap is now live for any R&D Tax Credits claims via the SME Scheme, for financial years starting after 1st April 2021.

R&D Tax Credits
Bulb
17 Mar 2022

Calculate R&D Tax Credit claims – Hints & Tips

Understanding how to calculate R&D Tax Credits claims can be a difficult task. Our expert consultants have put together their key steps for a successful R&D Tax Credits claim calculation.

R&D Tax Credits
Bulb

An independent consultancy, highly skilled and experienced

Assists organisations in accessing research and development grant funding across a range of UK and EU schemes and industry sectors.

Get In Touch