R&D tax reliefs are among the most under claimed tax incentives currently available meaning thousands of eligible companies are losing out on significant tax benefits.
The main reason behind companies failing to taking advantage is the misconception regarding what actually constitutes ‘research and development’ for the purposes of the relief.
Many mistakenly, and understandably from an initial glance of the guidance, believe that if there is not someone working in a lab then R&D is not taking place. However, the definition is much broader than this.
R&D does not have to involve ‘blue sky’ innovation, nor does it have to consist of creating new technologies. Instead, appreciable improvements to existing technology which would be regarded as such by those considered experts in their field (company employees for example) are qualifying activities.
- So ask yourself :
Has my company spent time overcoming a difficult problem where it was initially uncertain as to what the solution was? If the answer is yes, then chances are R&D is involved.
- Having considered that qualifying R&D activities may have been undertaken – what is this great incentive?
HMRC will allow an extra 125% (30% for large companies) of qualifying costs to be deductible against taxable profits. So for every £1 of qualifying expenditure you get a deduction of £2.25 in your tax computation which translates as an extra £1.25 of tax relief you would not have without the claim.
With current corporation tax rates ranging from 20% to 24%, this means a 25p-30p cash saving for every £1 of qualifying expenditure identified.
Also, loss making companies are not excluded, as losses can be surrendered to HMRC for a cash payment.
- Have I missed the boat?
Retrospective claims can also be made for the past 2 accounting periods.
- What costs can I include?
There are 4 key categories (although these are not extensive):
Consumables, i.e. any materials used in the process of R&D
Subcontract labour, e.g. quality inspectors, industry expert
What is more HMRC take a pragmatic view and relatively straightforward apportionment calculations can be carried out so if a person spent half their time one year on a qualifying activity then half of their salary would qualify.