6 minute read
Research & Development tax relief drives innovation and fuels growth, could investigating a claim transform your business?
What is R&D Tax Relief?
Research & Development (R&D) Tax Relief is a government tax incentive intended to reward UK companies who invest in innovation or allow them to mitigate the financial risks of unsuccessful development efforts. This valuable cash can be reinvested into your business, transforming your innovation project.
UK businesses now claim more than £7.4 billion of R&D tax relief annually with HMRC receiving nearly 83,000 claims per annum from micro‐enterprises through to the largest business in the UK. Unfortunately, many business leaders do not realise that these credits are available to them due to complex legislation and poor or incomplete advice.
Why Investigate a Claim Now?
The last 3 or 4 Budget announcements have held R&D tax relief at the front and centre of the UK’s economic growth plan, seeking to propel the UK to a position at the forefront of the world’s technological development landscape. More recently, it has sought to use the scheme as a cornerstone of the UK’s economic response to the Coronavirus Pandemic and Brexit fallout.
The R&D tax relief system remains one of the most generous tax incentives in the UK with eligible businesses receiving considerable financial benefits from their innovation. With a rolling 2 accounting period deadline, many businesses lose the financial value available to them as these deadlines come and go.
What Activities Qualify?
Qualifying research & development can be undertaken in almost every commercial sector, under current tax legislation, any company that designs, develops, or measurably improves products, processes, techniques, formulas, inventions, or software may be eligible to put forward an R&D tax relief claim. The key focus must be that the work aims to deliver a quantifiable improvement in knowledge or science and was materially challenging to deliver.
If you are investing time or money on innovation, you may be able to make an R&D tax credit claim and receive a cash tax credit or a significant reduction in your payable corporation tax. The legislation allows you to process claims for the 2 complete accounting periods which could deliver a considerable cash injection into your business.
What are the financial benefits?
Firstly, it is key to note that a business does not need to be profit-making in order to put forward an R&D tax relief claim. In fact, the system is more generous to loss-making businesses in some situations.
Loss-making SME businesses may be eligible to claim a tax credit equivalent to 33% of every £1 invested into qualifying R&D work with profit-making businesses able to claim around 25% of every £1 spent. These savings come in many forms:
- A cash repayment of historically overpaid tax,
- A reduction of payable corporation tax,
- The enhanced value of accrued losses carried forward or,
- Via a payable cash tax credit at 14.5% of the surrendered losses.
With the average UK SME claim in excess of £57,000 per annum, investigating a claim really could transform your business.
What are the risks?
As with any submission to HMRC, there is a potential risk of investigation. HMRC has recently gone on record stating that over the last 2 tax years more than £311m of R&D tax relief has been claimed incorrectly or fraudulently with 100 additional tax inspectors recruited to address this. Additionally, at the most recent Budget, Chancellor Rishi Sunak announced a wide-ranging public consultation and review of the R&D tax relief system with a number of new measures suggested to reduce fraudulent or incorrect claims being made, these changes are expected to come into play in April 2023.
Additionally, poorly constructed, or unjustified claims can have a considerable impact on the company, particularly regarding due diligence related to M&A activity or fundraising activities as potential buyers or investors unpick the qualifying activities and assess the risk of disruption or financial loss into the near-term future.
The good news is that capable, qualified advisors can reduce or remove this risk, compiling an educated and balanced claim with an accompanying written technical summary and well collated and presented breakdown of the qualifying costs being claimed as part of the work. When selecting your advisor, we would strongly recommend understanding the firm’s professional qualification, their end-to-end claim process, and their relevant industry experience. This will ensure the maximum level of protection for you and your business.
This article has been written by our R&D Tax Relief chosen partner Thomas Wells from Frazier Deeter. If you have any questions about Research and Development claims, please give them a call for an exploratory discussion without obligation on +44 (0)1737 240888. Alternatively, view our Contact Us page or email us at firstname.lastname@example.org for further information.
You may also be interested in joining our next discussion by registering for our webinar “How to improve the saleability of your business” on 17th March 2022 here.