Can Small Businesses Still Claim R&D Tax Credits And How Does It Work?
Many people (both businesses and accountants) believe that only large companies with big budgets and expenditure can claim research and development (R&D) Tax Credits. Indeed there are a lot of ‘urban myths’ around the scheme, and when you consider the complexity of the claims process it’s not particularly surprising. However, the truth it that’s it’s not just open to large, well-established companies - far from it. Neither are R&D Tax Credits simply the preserve of pharmaceutical and science/techy companies; the relief is actually open to everyone. In fact, there are all sorts of very good reasons why smaller companies in particular can benefit from an R&D Tax Credit claim, so now is the time to make sure your clients don’t miss out.
So what is the R&D Tax Credit scheme all about?
The R&D Tax Credit scheme is offered by the government to encourage UK businesses in developing new products and ultimately growing. Essentially, if your client’s company is involved in any kind of innovative work to increase scientific or technological understanding in their field, then they may well qualify. They must however be able to relate the project to the trade they’re already associated with, or to one they intend to expand in to.
Is it all about making something brand new?
No, not at all. With R&D Tax Credits it’s all about the experimental stuff - the ‘journey’ to discovery if you like. It’s not about the end result necessarily, neither is it about creating something the world has never seen before. It’s not about reinventing the wheel either; it’s simply about creating something which grows your company in some way. Yes, this could be by developing a new product, service or process but it could also be about improving an existing one.
Your client also needs to be able to prove that they have tackled a particular scientific or technological uncertainty which can’t be easily cracked by someone else working in the field.
R&D Tax Credits are popular, but many companies are still not claiming
This is particularly the case with smaller companies and start-ups, which is a massive missed opportunity as it’s these companies that are likely to need the cash injection most. In our experience it’s down to a number of reasons, including the fact that many businesses (and accountants) still don’t know the scheme exists. As we’ve already mentioned, others believe that it’s only for very large or very ‘techy’ companies, or they simply think that their own projects aren’t applicable. But with average SME claims for R&D Tax Credits totalling around £50,000 could your clients afford to lose out?
How much are R&D Tax Credits worth and which costs are eligible?
In terms of what can be claimed, SMEs can deduct up to 130% of eligible costs from their annual profit, in addition to the usual 100% deduction that all costs attract. If there is still some Corporation Tax liability left over, then a credit will be received against it. However, if the company has made a loss, it can receive the relief as a cash lump sum instead (although sometimes it can be a mixture of the two). As long as the company meets all the conditions, the benefit itself is worth up to 33 pence for every pound that a company spends on R&D activities. It’s worth noting however that from April 2020, a cap will be applied to SME claims that will restrict them to three times their PAYE and NICs liability.
When compiling an R&D Tax Credits claim, eligible costs would include things like staff salaries, materials and consumables, payments made to subcontractors and prototype/testing costs. However this is by no means an exhaustive list.
As a qualified business accountant, surely an R&D Tax Credit application is just a paper exercise - why would I need an R&D tax specialist?
Unfortunately, even for the most highly qualified and experienced company accountants, R&D Tax Credit claims can be incredibly confusing and complex. It’s a particularly specialised niche accounting area, with HMRC expecting not just a solid financial report, but sound analysis of the work undertaken. The more detailed the explanation, not just around what the work was but why a company believes it’s eligible, the less chance there will be of an HMRC enquiry or an unsuccessful claim.
R&D tax relief experts are adept at identifying all eligible projects and expenditure. They can therefore maximise a claim by including things that both business owners and accountants will likely not have considered relevant - thus generating a greater return. They will also know about any loopholes or rules, and can assist in strategical planning to avoid any issues.
What’s the timeframe?
R&D Tax Credit claims can be submitted up to two accounting years following the time when the R&D work took place. It can also be applied to a CT600 retrospectively, so there’s plenty of time to apply. However, it’s always worth your clients getting an application in promptly; strike while the iron’s hot as it were.
Once HMRC have received a claim it can take between 4 and 8 weeks to make any cash payment due.
How the Tax Cloud portal helps you help your clients
If any of your clients have recently undergone innovative R&D work - or they’re planning to - then we can work alongside you in helping them put together their R&D tax relief application. It’s no easy task; there’s a large amount of paperwork, an accurate narrative has to be written and figures submitted. Get it wrong and your client could end up out of pocket at best - at worst they could be investigated by HMRC.
If you would like to discuss any aspect of R&D tax relief or working alongside our expert team, call us today on 0207 118 6045. Don’t forget to also try out Tax Cloud portal for accountants (developed by our experts at Myriad Associates) to help guide you through the process and see what your client could claim.
Alternatively, please do drop us a message using our contact form and we’ll get back to you promptly.