Benefits of R&D Tax Credits to the UK's rapidly growing technology sector
According to Tech Nation 2018, the annual Tech City UK analysis of how UK technology companies are performing, “the digital economy is growing twice as fast as the wider economy, with an economic output of close to £100 billion per year.” Over a period of five years (from 2011-2015), the total number of UK tech businesses grew by 28%, and the growth rate for digital sector jobs was more than double that of non-digital jobs.
This is all great news for the UK economy, but many of these new technology businesses may be missing out on a fundamental UK government incentive for innovative companies: R&D tax credits.
R&D tax credits available to start-ups and established tech companies
Many businesses either don’t realise that they qualify for R&D tax credits or are not claiming their full entitlement. The R&D tax relief scheme has been in existence for over 15 years and nearly £2bn per year is currently being claimed. On average SMEs are claiming £46,000 each per year.
Most tech companies qualify for R&D tax credits, provided that the company is taking a risk by innovating, improving, or developing a product, process, or service. The project must contain a level of technical uncertainty for a competent professional – something that left the team involved scratching their heads over how to find a solution.
Is your business eligible for the SME or large company scheme?
For a company to be regarded as an SME, it must have a group headcount of below 500 staff and meet at least one of the following: a turnover of below €100 million or gross assets of less than €86 million. A large company is any company that exceeds the SME thresholds.
From 1 April 2015, the relief SMEs can receive has increased to 230% on their qualifying R&D costs. Loss-making companies can, in certain circumstances, surrender their losses in return for a payable tax credit.
Smaller companies may feel overwhelmed by the HMRC definition of R&D, and may not have the internal resources available to do further research on claiming R&D tax credits. However, HMRC publishes a manual on R&D tax relief and has provided a simple guide on R&D tax relief for small and medium-sized companies. There are also specialist HMRC units able to help with your claim, and you can find further assistance by contacting a specialist R&D tax credit advisor.
What activities can be included in an R&D tax credits claim?
The following activities would be considered eligible for R&D tax credits:
- defining technical objectives;
- identifying uncertainties;
- feasibility studies;
- reviewing new and competing technologies;
- analysing, designing and developing the technology;
- producing technical specification or other documents to explain and support the R&D project and advancement;
- testing the product, process or software; and,
- planning and managing projects.
In addition, certain indirect support activities may qualify for R&D tax relief, such as:
- administration, finance, and personnel services specifically required to support R&D activities; and,
- training to support R&D.
What costs are eligible for R&D tax credits?
The main areas of costs that can be claimed are:
- Staff costs (gross pay, employer’s National Insurance contributions, and employer’s pension contributions)
- Agency workers/externally provided workers
- Sub-contractors/freelance workers
- Software licence costs
- Consumable items (materials or equipment used or transformed by the R&D process)
You can use an R&D tax credits calculator to see an estimate of your corporation tax savings based on your spending on your R&D projects.
What could R&D tax credits be worth to a small or medium business?
For profit-making SMEs, the R&D tax relief would reduce the amount of corporation tax they pay on profits for the period, by the amount of the enhanced deduction. The current R&D tax credits rate results in a 26% benefit on R&D expenditure for profit-making SMEs. If the deduction is greater than the profit for the period, then this will create a loss for corporation tax purposes.
For loss-making SMEs, the company can decide between the following options:
- carrying back the loss to the previous accounting period (if there was a taxable profit);
- carrying the loss forward and offset against future profits:
- surrendering the loss (fully or partially) to HMRC in return for a payable R&D tax credit.
The company can surrender the lower of the enhanced R&D relief or the taxable losses for the period. The losses are surrendered for a cash credit (tax credit payable) and the current rate is 14.5%. So as the enhanced R&D tax relief is 230%, a cash credit can be worth as much as 33.35p for each £1 of eligible R&D expenditure.
Although there has been a continuing increase in the number and value of R&D tax credit claims, there are still thousands of companies – especially SMEs – that aren’t claiming what they’re entitled to. If you run a technology company, it’s very likely that you’re doing work that qualifies for R&D tax credits, and there’s no better time to make your first claim. You can only make R&D tax claims going back 2 accounting years, so if you don’t make the claims now, you’ll be missing out.