As a business, you may be unaware that you could claim certain tax credits for a process improvement via the use of technology? Most companies are, so let's examine what exactly is R&D tax credit and how we can make it apply to you.
What is it exactly?
Back in 2017, the government invested £4.7 billion into Research & Development funding in a bid to increase productivity in the UK. From this came a tax incentive put in place to compensate those companies that have made innovative developments and improvements to their industry.
There are many misconceptions and confusions over Research and Development tax credits. This can easily be mistaken for a scheme or grant, maybe even a loophole. Actually it is neither, it is a straight up tax law that came into effect in 2000.
Now, a majority of businesses miss out on claiming for major developments of the last 18 years due to those misconceptions. The amounts of money back have been sizeable for many companies and have been used as an alternative to innovation grants for r&d funding. Only Companies paying corporation tax qualify for R&D tax relief and can can come back to you in two ways; reduce your tax bill or you can claim payable cash credits as a proportion of your R&D expenditure.
Where could they claim
There are many industries that can find themselves qualifying so, in our example, a business that has automated their processes via the use of bespoke software development over a simple off the shelf product finds itself as an ideal candidate for R&D tax credits.
Many companies erroneously decide on an off the shelf product finding mere months later it does not do what was required. This money spent would be money pretty much thrown down the drain. However, those that have a system specifically built for their requirements suddenly find themselves able to claim a percentage of that expense back.
Companies that invest in this form of technological advancement can begin to calculate their time from their first meeting over the initial project (which counts under company time for those involved). From there, various areas such as staff time (including meetings, training and travel expenses in relation to the projects), subcontractor fees (up to 65%), purchases towards the project and various other elements can be claimed against. The initial claim for R&D tax goes as far back as the last 2 financial years, meaning that other areas of R&D unrelated to that project could still be claimable.
Even failed and shelved projects can be claimed against if there was sufficient Research and Development put into an innovative project or advancement, meaning that those companies may not be at a larger financial loss on projects that didn't get past various stages but had considerable company time and resources invested in them. Some companies could have written off over 30k on failed projects that now suddenly are able to be claimed against. Now that's good news for any company.
How much comes back?
The current rate results in a 26% benefit on R&D expenditure for profit-making SMEs and 33.35% can be achieved for loss-making SMEs. In plain terms, if a company spends 100k on a project, then 26k is claimable with R&D tax credit. That is a valuable cash injection to companies they can reinvest into projects and claim ongoing for the future, meaning that the more you invest into your automated system the further you can claim as an ongoing development.
Why would HMRC give this money back?
Developed as an incentive to encourage UK companies into increasing wealth and creation, HMRC benefit from the companies growth in different forms of taxes, be it employment of more staff or purchases of new machinery, increasing of company profits and higher salaries for directors resulting in higher corporation tax. This helps to further develop the economy with businesses investing in UK innovation.
How to claim
Most accountants will have the ability to submit an R&D claim or have an active partnership with an R&D consultant. Some companies use an R&D tax credit company which can charge upwards of 30% of the amount you receive back for their service. If approached by an R&D firm it is always worth conversing with your accountant prior to working with them as all R&D firms have to liaise with your accountant who ultimately submits the report to HMRC. There are firms that will take as little as 10-15% and it can take as little as 6-8 weeks for your claim to be realised.
What does not qualify
Off the shelf products that have improved your business processes are not qualifiable as no specific research and development has gone into the project. The company may have had time training the staff or looking for the right product, but this does constitute as qualifying expenditure. Projects that fall outside of the previous two financial years can not be claimed against, although if certain aspects of development ran into a qualifying financial year they could potentially qualify and should be documented for review and inclusion.
Could this change
Grounds for eligibility do change on occasion and it is important to remember that 2018 saw a record number of fresh claims for R&D in awareness since November 2017. As the economy changes, so could eligibility for many companies that later come into the knowledge of R&D tax. As technology becomes more and more advanced and commonplace in business, soon the area of claiming back staff training may become obsolete to claim against, as could other areas that are claimed against most commonly.
R&D tax credit is an extra incentive for your business to be investing in its future and how it could be getting returns not just on profits and processes, but also on its advances and forward thinking. So therefore, companies now have extra incentive to move forward with streamlining their business. Not only do they stand to benefit from a system designed specifically to increase their productivity and profit, but also a system that qualifies for a percentage of that cost to come back every financial year end with an R&D claim.