Research & Development Tax Credits
Author: Tim Lewis, Managing Director of M4 Business Solutions Ltd.
- Claim up to double your product development costs against tax, backdated up to 3 years.
- Paid as a cash refund or relief against future profits.
- Allowable expenditure includes Staff costs, Consumables and raw materials, Sub-contracted costs, External labour, Heat, light and power.
- You must meet certain criteria – but huge numbers of qualifying companies fail to claim.
A small manufacturer of solar energy powered signs invested £130K in R&D and obtained a £20,500 CASH refund from the Inland Revenue.”
This scheme was introduced in 2000 initially for Small and Medium Enterprises (SMEs), with a revised version for Large Companies two years later. It forms part of the CT600 form that every limited company submits to H M Revenue and Customs (HMRC), annually, showing the calculation of their Corporation Tax liability. As such, it is an entitlement and should not be seen as a tax avoidance measure. It is no more aggressive than Capital Allowances.
This is a European wide scheme, although the details vary country by country, and it is intended to encourage innovation and technological advances within the EU, as a whole, and, in our case, the UK in particular. Overall, take-up of the scheme in this country is poor. HMRC estimates that 100-150,000 companies undertake qualifying work but, last year, only 8,300 claims were made.
So, what is R&D? For most people it conjures up an image of boffins in white coats toiling over Bunsen burners with boiling test tubes and flasks of fuming liquids. For a very few companies, particularly in the pharmaceutical industry, this is the case but, for the vast majority, it is the D, not the R, that is relevant. Does your company undertake product development? Do you try and make your product greener, more efficiently, more cheaply? Are you trying to use more environmentally friendly production techniques or materials? Have you had to develop systems to enable you to do these things? If your development work can be readily carried out by a competent professional with reasonable experience in your field, then it is unlikely that this will qualify.
If, on the other hand, you have had to sit-down, scratch your head and think ‘How the hell are we going to do this?’, then it may very well qualify. You do not have to be making industry changing developments but you do have to be able to demonstrate that there was a degree of difficulty involved, that you had to innovate or overcome some form of technical or scientific difficulty and that you took a financial risk.
You could be developing the most technically advanced widget in the world, overcoming all kinds of technological obstacles and pushing the boundaries of human knowledge to unimagined limits on behalf of a client but, if you are being paid on a time and materials basis, regardless of the successful outcome of the project, you do not have a valid claim. On the other hand, if you undertook the project on a success fee basis, you would possibly have a valid claim. Don’t be afraid of failure. Failed projects can be valid, they often demonstrate that a degree of difficulty exists and can help to support a claim.
For the purposes of this scheme an SME is defined as a company with less than 500 employees and either, less than €100 million turnover or, less than €86 million balance sheet value. If a business falls outside these parameters it is defined as a Large Company. For the purposes of this article, we are confining ourselves to the scheme as it applies to SMEs.
Allowable expenses fall into five main categories:
- Staff costs
- Consumables and raw materials (this may include software)
- Sub-contracted costs
- Externally provided labour
- Heat, light and power
Within the terms of the R&D Tax Credit scheme a company may make a claim for its current Financial Year, as well as the two prior Financial Years (i.e. if a company has a 31st March Year End, in January 2012 it can claim immediately for the years April 2009-March 2010 and April 2010-March 2011 and for April 2011-March 2012, once the accounts for that year have been published). The principal benefit of the scheme derives from the fact that a company can off-set a greater amount for the purpose of calculating Corporation Tax, than it has actually spent. Prior to April 2011 this uplift was 75%, from 1st April 2011 it is 100% and from 1st April 2012, 125%. Consequently, for every £10,000 of allowable R&D expenditure before April 2011, a company can claim £17,500 tax credit, rising to £20,000 in 2012. For companies that have not made a claim, this means that for prior years the tax calculation has resulted in too high a taxable profit and the claim comes about by recalculating the tax due.
If the company is profitable, and a Corporation Tax payer, it can receive a rebate of tax as a cash sum.
Depending upon the specific circumstances, if the company is loss making and does not pay Corporation Tax it can effectively ‘sell’ the loss to HMRC at a rate of 24.5p in the £, or retain the loss to set against future profits.
An R&D Tax Credit claim consists of two elements: a tax computation (purely numerical) and a detailed justification of why the claim meets HMRC’s criteria. This latter is the key component of the claim, requiring a considerable grasp of the projects being claimed for, a detailed knowledge of the scheme criteria and how one complies with the other.
This requirement to be able to relate the detail of what the company is doing to the complexity of what constitutes qualifying R&D makes this an area for experts. It is this that puts many accountants off making claims on behalf of their clients. Because they come across potential claims relatively infrequently, they are unfamiliar with the detail of the scheme and wrongly advise that no claim exists.
About the Author:
Tim Lewis specialises in helping companies get R&D Tax Credits and Pension-based financing. To contact Tim call him directly on 07887-715671.