Credit where it's due

You might not know it, but the government is falling over itself to give you money in the form of R&D tax credits… Tax expert Steven Sacks tells us what we need to know

Companies in our industry which invest in research and development are evidently valued by government as demonstrated within the recent Industrial Strategy Green Paper. The government already provides tax credits to companies which spend on research and development to aid innovation within the UK. In the recent budget it was stated that government will put forward initiatives to increase the simplicity around claims and will also improve the awareness of the R&D tax credits scheme.

We all know that innovation in industry can save manufacturing time and money and many of the products designed can help other businesses operate more effectively. A good example of this would be virtually any incorporated business that either owns or uses laboratory services – since these are evidently and almost exclusively used for the purposes of research and development and therefore are absolutely qualified to make legitimate claims under the tax legislation.

The government are obviously mindful of the potential disruption to the economy that Brexit will bring and they are keen to build the high value IP based assets that will create the value for the economy that will increase our financial performance as a country. Recent numbers bear this out as they indicate that for every pound the government gives companies in R&D tax reclaims it ultimately collects six pounds of taxation.

Perhaps unsurprisingly, the government aren’t enormously keen on supporting research in other EU countries at the expense of our own industry

Currently the scheme is partially funded by Brussels which means that every pound not claimed by British researchers is a pound more that the UK pays to the EU to fund our European competitors. Perhaps unsurprisingly, the government aren’t enormously keen on supporting research in other EU countries at the expense of our own industry. These drivers will ensure that this scheme will most probably remain central to governments tax strategy both pre and post Brexit.

Is this for you? One thing is for certain, research and development can be extremely expensive and hard to budget for. Exploring new waters is a risk in itself and entrepreneurs may be hesitant to invest so much in R&D with the fear they may not get a profitable result. If you feel as though your business can be driven forward by research and development, then it may be worth contacting a R&D tax specialist to see if you are eligible for this. We have many clients undertaking long term projects that will be of huge value to them and their stakeholders and to wider society ultimately but many of these hugely valuable companies struggle for profitability for a long time before ultimately blossoming. The amount of expenditure necessary to support their R&D means that often companies are not profit making but the tax credit scheme allows them to get the cash that they need to support the team to make continued significant technological advances.

The R&D credit can either be in the form of a tax deduction or possibly used as a cash tax credit regardless of whether your business is making a profit or not. Profit making SMEs who spend, for example, £200,000 on R&D which qualifies under the scheme could receive up to £52,000 as a tax refund or reduced tax liability. Loss making SMEs can receive up to a £66,700 credit or £36,000 in cash for each £200,000 spent. Claims can be made for up to the last two accountancy periods.

Successful claims are not achieved by box ticking but by building a strong narrative case with accurate and reliable costings attached

If a claim is not made by the financial year end, the initial year you may have been eligible for a refund from may finish and therefore that year may no longer qualify for a refund so time is very much of the essence. Successful claims are not achieved by box ticking but by building a strong narrative case with accurate and reliable costings attached. Producing this report can take several weeks as information is gathered and collated.

It’s all in the report These reports can be produced by the companies themselves, by their accountants or by a specialist R&D claims consultant. Given the high level of technical requirement that is necessary in order to make a successful claim and the time taken in order to deliver it companies would be well advised to use a claims specialist especially given that they generally work on a contingency percentage of success. This means that the consultant’s goal is entirely aligned with the claiming company and that they will remove the work from the company and no cost is incurred by the claimant until after they have banked a successful claim. Some specialists will also offer insurance that covers the claimant should HMRC ever investigate the claim and ask for it to be repaid. This is however virtually unheard of since reports are heavily scrutinised at the point of submission meaning that subsequent investigations are unusual.

If you feel that your business qualifies to make a claim and it hasn’t done so in the last year and you are interested in getting a justifiable cash refund then you should take action without delay to prevent being timed out.

[box type="shadow" ]THE TWO STAGES OF A SUCCESSFUL R&D TAX RECLAIM 1) Identify relevant spend. If you can answer yes to any of the following then you may well have a good case: • Have you recently installed an automated/control system? • Has your business created or modified software in order to improve process efficiency? • Does your business design and complete experimental activity? • Has your business advanced technology in your industry? • Has your business advanced knowledge or capability in your industry? • Has your business modified plant or machinery? • Does your business operate any laboratory equipment? • Does your business analyse laboratory data or physical parameters? • Have you completed a process design within your business? • Does your business process hazardous waste? • Does your business have to deal with processes that prepare, purify and/or separate materials to create products? • Does your business plan, design, test or modify products, processes, devices systems and materials? • Does your business manufacture products? • Does your business undertake continuous improvement activities in relation to its products? • Do chemical reactions take place in your business? • Does your business look to improve the wastage of expensive materials through advanced recycling techniques? • Does your business utilise mobile applications within its day to day operations? • Does your business utilise lean manufacturing techniques? • Does your business complete clinical trials? • Does your business develop generic drug replacements of off patient applications? • Does your business transfer new technologies from parent organisations? • Does your business develop new consumer drug formulations and coating techniques? • Does your business get involved in developing greater understanding of organic matter? • Does your business develop new processes for the production of existing devices? • Does your business plan, design new chip-set/electronic circuit layouts? • Has your business had to overcome thermal/cooling management issues to improve reliability or efficiency? This is not a comprehensive list but highly indicative of the kinds of activities that are relevant and successfully claimable.

2) Applying cost to relevant activities. The report that is submitted to HMRC will need to feature a strong narrative, rationale and be costed. The costs that are claimable include: • Internal costs such as staff and consumables. Some of this is quite objective but some is quite subjective such as items like the time invested by the managing director for example since it is unlikely that exact time keeping records will exist. • External costs such as contractors and external suppliers which can even be overseas provided the claiming entity is a British company.[/box]

Author: Stephen Sacks is founder of R&D claims specialists Funding Nav

stephen.sacks@fundingnav.com