Tax Credits Get a Boost

Tax Credits Get a Boost

Many businesses are missing out on substantial tax credits they could be claiming for research and development projects.

Theresa May’s government has pledged £2bn a year to R&D by 2020, a step up from the previous government’s £1bn. It’s a commitment underpinned by the fact that every pound spent on research yields significantly more than the initial investment, from at least half again to more than double the cost.

R&D tax credits enable companies that incur costs in developing new products, processes or services to receive a cash payment or tax deduction. A particular focus will be on robotics and biotechnology, which the government considers to be priority technologies. These are areas that offer the potential for the UK to take a global lead.

Last year, research by the UK BioIndustry Association estimated that biotechnology companies in the UK raised £489m in venture capital in 2015, an increase of £166m in a year.

Don’t count yourself out

But the rhetoric around robotics and biotechnology shouldn’t put off businesses that aren’t creating the next immunotherapeutic drug or last-mile delivery drone.

Brian Williamson, managing director of R&D tax credit specialists Jumpstart, says that, for his clients, the tax allowance is typically used for the development of either software or an additional piece of functionality, rather than new product development. The typical split is 60% for existing products and 40% for new ones.

“People contextualise where they think they do R&D; it’s usually associated with a white coat and a test tube,” says Williamson, pointing out that some basic technologies don’t fit this mould.

“R&D tax credits can be a very valuable source of funding for many businesses, with up to 33.35% of a company’s R&D spend being available as a cash repayment from HMRC”
Forrest Brown

Companies can also be put off by the expected inspection of a claim. “The sector under greatest scrutiny is IT. As a layman it seems quite complex. If someone is developing software and they’re not a software company, we explain why. We answer the questions before HMRC ask them.”

According to HMRC, a business qualifies for R&D tax relief (or credit) when the company is “carrying on a project that seeks an advance in science or technology”. The HMRC manual on R&D says: “It is necessary to be able to state what the intended advance is, and to show how, through the resolution of scientific or technological uncertainty, the project seeks to achieve this.”

Williamson adds: “The legislation also allows you to claim for incremental changes.”

The average annual claim for UK SMEs is £54,000, according to research from tax credit consultancy ForrestBrown. The consultancy observes: “R&D tax credits can be a very valuable source of funding for many businesses, with up to 33.35% of a company’s R&D spend being available as a cash repayment from HMRC.”

From the deep sea to dining

Offshore engineering company Marine Electrical Services Aberdeen Ltd (MESAL) claimed back on the funding it took to develop specialist software. The company wanted to improve the capability of laying cables at sea, and developed an electronic control as part of a cable-tensioning system.

It used recent advances in AC electric motor-drive technology alongside existing circuitry and software to build a system capable of ensuring precise cable tension, even in waters as rough as the North Sea.

Pete Buchan, MESAL design engineer, says of the process for submitting a tax claim: “I have to admit to being a little sceptical at first.” He says that despite having approached the project “in a novel fashion, we were still using essentially industry-standard circuitry and software components”. However, the claim was accepted by HMRC.

Creatives can benefit, too

Tax credits can also be claimed for creative industries, and the government has specific guidance for film productions, animation, video games, theatre and orchestra development.

Food and drink also come under the remit for tax claims. Two-Michelin-star restaurant Sat Bains in Nottingham has a kitchen for development work, and created a long-life liver parfait, which helps to reduce wastage, as well as an aerated chocolate desert.

The restaurant qualified for R&D tax credits, much to the surprise of the eponymous chef patron Sat Bains. “Our chocolate dish took us ages, almost nine or 10 months [to perfect]. It was great to be able to claim on something that had taken us such a long time,” he says.

Who can claim R&D tax credits?

R&D tax relief is available for SMEs and larger companies. Your status as an SME in the eyes of HMRC may differ for R&D claims, when an SME is considered to be a company with fewer than 500 employees, an annual turnover under €100m (£85m) or a balance sheet under €86m (£73m). If your company is part of a group, the size of the group will determine whether the R&D relief is considered as an SME or under a large company scheme. Tax relief can be claimed if the R&D project is taking place overseas, as long as the company conducting the work pays UK corporation tax.



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