What Kinds Of Business Activities Jump Out As Being R&D?
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The R&D Tax Credit incentive was launched by the UK government back in the year 2000. It’s a popular scheme that offers help towards innovative costs for companies carrying out research and development. It’s provided either as a reduction in a company’s Corporation Tax or as a cash lump sum and the scope for claiming is amazingly broad. However, many companies that have undertaken R&D are still missing out on this vital income stream - potentially meaning thousands of pounds less ending up in their pockets.
Why are companies missing out - and could a client of yours be eligible?
Myriad Associates (developers of the Tax Cloud UK portal), have come across many different reasons why eligible companies aren’t claiming R&D tax relief. Generally speaking it’s because of three things: either they don’t know the scheme exists, they know it exists but don’t believe they’re eligible or they simply dismiss it as too much hassle. Many have also received poor or inaccurate advice from third parties.
So what actually counts as R&D?
The key thing is that your client’s R&D work must involve an element of risk, i.e finding the resolution to something for which the outcome is uncertain. It must also lead to an advancement in an area of science or technology.
Your client’s company should also be able to demonstrate that the technical problems they were looking to resolve actually have advanced technology or science, not just advanced the knowledge of employees working at the company. Additionally, there must have been research undertaken, and the problem must not have been easily solvable by a professional working in that field.
R&D Tax Credits can even be claimed if the R&D project ultimately failed. However, clients need to be careful regarding how prototypes are developed, and HMRC have recently updated their guidance here. This is why it’s so important to collaborate with R&D tax relief specialists like ourselves, as by working alongside us you can be sure to advise your clients correctly.
On receiving a claim for R&D Tax Credits, HMRC will need to know what problems the company faced, what advancements were made, and how problems were overcome. The challenges of the work, and the R&D nature of it, must be made clear.
Product and process development can count as R&D
The R&D Tax Credits scheme is not just aimed at companies developing the latest wonder product. They also apply to companies carrying out their daily business of developing systems, products and services that deal with and resolve technical problems along the way. R&D projects may also be undertaken by organisations that don’t usually carry out much R&D at all, or where the amount spent on innovation is low (there’s no minimum claim amount).
Examples of R&D work that could be eligible for R&D Tax Credits
Insurance companies - the development of a new website for example, providing a customer engagement platform the likes of which were previously unseen.
Manufacturers - overcoming technical problems when producing products for customers is part and parcel of daily life for many manufacturers. Whilst some can be solved routinely, others will need more in-depth research investigation which may well fall under R&D. If any of your clients have companies in the manufacturing sector it’s likely R&D has taken place recently so it’s well worth having the R&D Tax Credit chat with them.
The IT sector - IT companies often create bespoke programmes, either for their clients or for use themselves. Typically such programmes will be unique and have necessitated detailed examination of things like algorithms, computer languages and AI to build the final software package.
Metal fabricators - building free-standing large metal structures for example, in difficult conditions where temperatures are variable can be challenging. R&D will be required to ensure that the structure doesn’t fail which may also extend to the fabrication process essential in achieving this.
Architect practices - architects work on largely bespoke projects for their clients, many of which will involve construction methods never tried before. It could be about harsh locations/environments and new techniques/materials for example. This where the technical uncertainty comes in that could make such work eligible for R&D tax relief.
What work will not be classed as R&D?
Some firms mistakenly believe that simply because they deem their work to be R&D then it will automatically be eligible for R&D Tax Credits. This means a bit of a shock can come when HMRC rejects the claim because the project does not meet HMRC’s tight criteria.
As a business accountant it’s vital to understand that just because something is new for a particular company it doesn’t necessarily make it R&D. For example, building a new website is not R&D per se, and searching the internet is not R&D; that’s just advancing a company’s own knowledge. R&D as required for claiming tax relief is about advancing scientific or technological understanding across the whole sector.
Making an R&D Tax Credit claim
Once it’s been ascertained that R&D work has taken place, the amount claimable is then dictated by HMRC’s rules and guidelines. However, the relief can be worth a large amount of money (up to 230% of qualifying R&D expenditure for SMEs) so if your client believes they’re eligible you should encourage them to apply.
Try out the Tax Cloud UK Calculator
If you’re a business accountant who’s not sure about any aspect of R&D Tax Credits, speak to the team at Tax Cloud UK on 0207 118 6045 or use our contact form today. We can work alongside you in giving your clients the most accurate R&D tax relief information and advise you through their claims process.
Our handy Tax Cloud Portal for Accountants is a quick and easy way for accounting firms to offer a comprehensive R&D Tax Credit service, and was created by the experts at Myriad Associates. It even integrates with Xero and is a great way to attract new clients and boost your bottom line too.