Research and Development Tax Credits to Encourage UK Businesses

Why Aren’t You Taking Advantage of R&D Tax Relief?

Do you fancy being on the receiving end of fat tax relief for eligible expenditure towards research and development? Don’t just assume that your project won’t be eligible, because research and development is quite widely defined, and goes well beyond our assumptions that it’s only research and development in scientific labs.

History of R&D credits

In 2000, HMRC introduced Research and Development tax credits to encourage UK businesses to take up the mantle and undertake more projects that advance knowledge in science and technology.

The overall aim was to increase R&D spending to 2.5 per cent of GDP by 2014. Currently, despite HMRC’s encouragement to UK businesses to further R&D claims to drive growth, only a small, albeit growing number of eligible firms have actually made claims.

Why is it that businesses don’t claim?

The reasons why businesses don’t claim are varied: some believe they won’t qualify; others feel that the process will be too complicated or the costs too expensive.

Who can claim R&D credits?

• Small and medium-sized enterprises (SMEs) defined by HMRC as employing less than 500 people;
• Must be limited companies or PLCs.

What projects qualify?

There is some confusion about what "research and development" is exactly and what sort of projects qualify. According to HMRC, it is when a project – or a component of a larger project – seeks to achieve an advance in science or technology: "Any activity that directly contributes to seeking an advance through the resolution of a scientific or technological uncertainty can be classified as research and development for tax purposes."

To qualify, therefore, a project needs to seek technological advance and have some element of uncertainty (requiring "trial and error"). Broadly speaking, many R&D activities qualify:

• Software development
• Designing new products
• Precision engineering
• Products using new materials
• Enhancing existing products or technologies

Typical R&D expenditures can cover:

• Staff costs
• Subcontractor costs
• Software licenses
• Consumables
• External testing

Creative thinking and strategic planning

Think creatively to figure out if you are involved in any research and development. Remember, it’s much wider than you think. Consider whether you are:

• Appreciably improving something
• Improving performance of something
• Developing or adding value to something, such as products and processes.

Does your business have an idea for a new system, in technology for example, which might improve performance? Could you add value to something that already exists, a product or a process, or could you improve the way a system, product or even an idea performs. Among DNS’s clients are specialists of many sorts, so think wide and think big about whether there is an element of "technological uncertainty". 

Example

Take Dave and Jim who own their own software company, Spectrum, which processes images for the art world, digitally, in print, and online. They decide to take the plunge and put into development a new system to take care of one particular aspect of their company: colour-matching for the reproduction of fine artworks. They get to work sorting out the development, staff costs, external testing, licenses, and consumables in order to apply for R&D tax relief. Then they get advice about developing their pitch and come to DNS to help work out the figures. Finally, they apply to one of the specialist R&D units

All qualifying expenditure comes to £100k, but under the scheme, their qualifying expenditure, for tax purposes is considered as 225% of the overall sum, which is £225,000. This means that Spectrum get relief of 20% on £225,000, which is equal to £45,000.

Then of course, Dave and Jim are laughing: development of that small aspect of their business attracts hundreds of new customers to Spectrum.

How can DNS help?

DNS stands out among other accountancy practices because we understand R&D and its wider coverage, the sorts of projects that attract this generous handout, and the process involved in winning it. DNS can:

• Advise you on the likely success of your application; and then point you in the right direction for:
• An interview;
• To prepare your claim
• Prepare your application and documentation, and then:

• DNS will do the returns. 

So what are you waiting for? Get on with it!

If you have read this and find yourself saying, "it sounds too good to be true", or "we don’t have the time or resources", stop for a moment. Then contact your account manager today to discuss it further, R&D tax credits cover a wider spectrum of research and development than you would have assumed.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.