The R&D tax relief scheme can provide SMEs with a return of up to 33% of identified eligible expenditure incurred on qualifying R&D projects. This is an incredibly generous tax incentive. Since most companies will be involved in the development of new products and implement new processes as they seek to expand their markets, does this mean that everyone and everything qualifies?
Well, sorry but no. That would be too good to be true!
A successful R&D tax relief claim requires not only a knowledge of the technical aspects of a company’s industry, but also an understanding of the subtleties of HMRC’s guidelines. Not all work treated as development using standard accounting principles will qualify for R&D tax relief.
So what are the areas you should pay particular attention to? Dr Kevin Bailey, Technical Analyst at Jumpstart breaks down some of the main points and offers some relevant examples and practical tips for clearing the most troublesome hurdles.
Myth #1 – But it’s never been done before!
So, surely my work must qualify for R&D tax relief? Well, not necessarily so. It there a technological or scientific uncertainty that needs to be resolved in order to develop a functional product or process? Or is this a case of simple exploitation of a great and innovative idea using techniques and technology that are currently readily available? If the latter is the case, then all hope is not necessarily lost, as there may be some uncertainty about the integration of existing technology. However, in these cases a strong argument for eligibility under the scheme may be difficult to find.
Myth #2 – If we’ve been working on the project for the last two years and spent £200k to date, involving ten staff, then we should be able to claim £66k back?
Not necessarily so. Remember HMRC’s definition of an R&D project differs to the definition of a commercial project. R&D starts once a technological uncertainty has been identified, an advance sought and finishes when the work done to resolve that uncertainty ends. This may be just a small element of a commercial project, which may contain several distinct stands of qualifying R&D activity. Sitting either side of the R&D project may be a period of non-qualifying market research and non-qualifying customer feedback and commercialisation and logistic tasks that do not contribute to the R&D project. The R&D project may be concerned with the development of an asset, or a first-of-class item sold to a customer, or the purchase of machinery and equipment in order to undertake R&D, costs that would not qualify under the R&D tax relief scheme.
Myth #3 – We don’t pay corporation tax so there is no benefit for us
There are lots of different types of benefit the scheme can offer companies, depending on whether they are paying tax or not and the scheme they claim under. See our myth busting table below! The fact Large Companies can now receive a cash credit if they are not paying tax is another sign of the scheme rewarding companies investing in innovation and research!
The upshot is that while claims can be disarmingly simple to submit, they can be bafflingly complex to submit successfully if you fall into the trap of making one or more of the mistakes mentioned here. And as HMRC continues to improve its policing of the scheme, mistakes will be caught more often and with greater financial consequences for applicants.
With this in mind, it can pay dividends to take advice from a reputable technical and legislative specialist before preparing and submitting your claim. As your GP would say, ‘Prevention is better than cure!’, and engaging the right company early on will almost certainly minimise the risk and time involved in your claim.
To arrange a free consultation to discuss your own R&D tax relief specific circumstances, to identify how we can work with your team to improve the claim process and realise greater value for your business, contact the Jumpstart team on 0131 240 2900 or firstname.lastname@example.org.