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Published 2 September 2014
Following the worst recession in the modern era, the Government is keen to send out the signal that Britain is open for business. Creativity and innovation will be crucial to the future of the UK economy.
HMRC is actively encouraging further Research & Development claims, but currently believes that only 3% of eligible firms actually make claims. Many of the businesses missing out are small and medium-sized companies, which either have no idea that they may qualify or consider the process to be too complicated or expensive.
The current definition of R&D is as follows:
"R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D. Certain qualifying indirect activities related to the project are also R&D."
The best way to look at it is by breaking it down into the component parts:
In all R&D Tax Credits claims, HMRC is looking specifically for what they call “technological uncertainty”. If the project had a certain outcome, it’s probably not R&D. If the outcome was uncertain only because of your own lack of experience in the field, or for commercial reasons, then that’s still not R&D. The project should be uncertain because of technical reasons.
But who decides whether it’s uncertain? Well, HMRC uses something called a “competent professional” although there is no agreed definition of what a competent professional actually is. What we advise is to ask yourself were there any aspects to the project that you were unsure could be achieved for any reason. If the answer to that question is yes, you may have R&D.
If your project achieved a technical feat that no other project has achieved, then it is likely to be R&D. If it achieved something that few others have achieved, and if exactly how they did it is not commonplace knowledge, then it could still be R&D. On the other hand, if what you’ve done has been seen a thousand times already and is generally regarded as common knowledge, then it probably won’t qualify as R&D.
Examples of qualifying trades include:
Of course, the list above is by no means exhaustive.
From April 2012, relief for SMEs rose to 225 per cent of R&D expenditures, which are now claimable against corporation tax. For every £100 spent, you can claim tax relief on £225. A company spending £50,000 on eligible expenditure would typically reduce their tax bill by a further £12,500.
HMRC will even pay you a refund on a reduced figure when the company is a loss-making entity. What’s more, you can claim R&D tax relief on expenditure that is up to three years old. The precise size of the tax credit will depend on the size of your company, its tax rate and how many of your activities are eligible.
You can make a claim yourself by compiling a detailed technical report and comprehensive financial documentation. HMRC provides plenty of guidance and advice; it runs to several hundred pages, in fact. Or you could leave it to a specialist. That may very well be us. Most advisory firms will tell you whether your project qualifies free of charge so it’s definitely worth having a chat, even if you plan to file by yourself.
HMRC believes there are potentially over 150,000 SMEs that could benefit from the scheme. Your company could be one of them.
John Dunlop, Matt Spencer, Michael McCormack
Richard Highley, Dan Preddy