Do R&D Tax Credits need to be overhauled?
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Earlier this year, the Coalition for a Digital Economy (COADEC) carried out a piece of research around how R&D Tax Credits are currently implemented in the UK, and where improvements can be made. There were several key findings which we’ll look at in more detail, including whether the system should be simplified and why there’s confusion about what is classed as R&D in the first place. But will the government sit up and take notice.
What are R&D Tax Credits exactly?
Launched in the year 2000, R&D Tax Credits are a tax incentive offered by the UK Government. They essentially allow a company to reclaim up to 33% of its R&D expenditure back, even if the project was not successful.
Both SMEs and more established companies can be eligible for the relief, whether they are profitable or not. Larger companies apply via the RDEC scheme and can get up to 10% of their R&D refunded.
The benefit is paid out as a refund on a company’s Corporation Tax bill, or as a negative Corporation Tax, after the end of the financial year. It’s tax free and can be used for a whole range of costs going forward, from buying equipment to taking on staff.
What can R&D expenditure include?
For the purposes of claiming R&D tax relief, eligible costs include:
- Staffing costs
- Subcontractor costs
- Testing and prototyping
- Developing manufacturing processes
- Technical analysis
- Supporting software/SaaS
- Software licenses
How does the UK measure up against other EU countries when it comes to R&D?
Before we continue, it’s worth looking at where we stand in comparison to other countries as this will provide some context.
Money spent by the UK on investment over the last 5 years has been between 1.66% and 1.68% of GDP. Over the same timeframe, the average investment expenditure across other EU countries was 2.07%. Denmark and Germany specifically are both leading the way at 3%.
Essentially, Britain is not investing in innovative projects to the same degree that other countries are doing – we’re ranked 11th in Europe in fact. The government has acknowledged this by recently setting an R&D expenditure target of 2.4% of GDP by 2027. By today’s figures, this means a 50% increase which is ambitious by anyone’s standards.
How can we make R&D Tax Credits more effective?
COADEC's research serves to highlight several areas of weakness within the current R&D Tax Credits scheme, and recommendations have been put forward around how to improve it. They include:
1. Allowing data sets to be purchased for tech development
In the R&D process, data is not classed as a consumable. This means that money paid out for data sets is not eligible for R&D Tax Credits. However, it’s vital to the R&D projects of a large number of tech start-ups, including machine learning and AI, so it would be a boost to cutting-edge innovation if this cost could be included.
2. Improve HMRC’s tech expertise
If R&D Tax Credits are going to become more effective and relevant for tech start-ups, HMRC’s expertise will need to catch up. The tech sector is incredibly fast-paced so HMRC needs to make sure it’s not left behind.
3. Allow cloud services costs to be fully included
Cloud services are used by the vast majority of tech start-ups and scale-ups. It’s impossible to create new algorithms, work with large data sets, or launch large-scale sensors without the cloud. However, research has shown that there is a lot of variation around whether these costs can be included in an R&D tax relief claim. It’s essential that start-ups can access everything they need to build world-leading products and services to clarification is required here.
4. Allow UI/UX development work to be part of an R&D Tax Credit claim
More than 80% of start-ups are known to undertake significant amounts of UI/UX which are a critical part of their R&D activities. As it stands, start-ups cannot claim for all of the costs they incur in developing innovative solutions to their product’s front end. Technology firms cannot take a product to market unless it’s been properly tested by users. Therefore they need to be reassured that HMRC understands and appreciates UI/UX work, and make all of it claimable in the credit.
5. Create a self-regulatory body that provides a level playing field for advisor standards
Finding good quality, skilled tax credit advisors can be a massive challenge for any company, but particularly for start-ups that are brand new to the process. Currently there is no self-regulatory body, however, if there was one then companies could be more confident of minimum service standards and less ambiguity.
6. Provide improved feedback on claims and ensure clarity in the system
One thing all businesses thrive on is certainty - and that extends to their R&D Tax Credit applications too. Many applicants have made it clear over the years that feedback from HMRC - particularly with regard to questions or rejection - is not always very clear. Whatever legislation surrounds tax credits in the future, clarity is absolutely crucial so companies can understand quickly and easily what HMRC needs them to do next.
7. Proactively promote R&D Tax Credits
Too many companies still haven’t heard of R&D Tax Credits and don’t know how to claim. The government has made a commitment to boosting Britain’s R&D expenditure so should be championing the R&D Tax Credit scheme in every way it can to achieve this.
How far the government takes these recommendations is yet to be seen. But for whatever reason, many companies are still missing out on R&D cash that’s owed to them - and that’s a huge missed opportunity.
If you would like to find out more about COADEC's research, you can see the full paper here.
How can Tax Cloud UK help?
You’re busy getting on with your day job - and your clients are busy too. Working through the figures with regard to R&D Tax Credit can be time consuming, and calculations need to be fast.
With different sections for both accountants and businesses, simply sign up to Tax Cloud and we can handle your clients R&D claim from start to finish whilst you claim a referral fee. This allows you to save time, save hassle - and help your clients achieve the very best outcome.
If you need any further advice on R&D Tax Credit claims, our expert team will be pleased to help. Drop us a line on 0207 118 6045 or use our contact form and we’ll get back to you.