British businesses unlock R&D relief bonanza

R&D
iStock_ND3000_AW
Francois Badenhorst
Business editor
Sift Media
Share this content

British businesses are using R&D tax credits at a record rate, according to the latest HMRC statistics. The data shows a 22% increase in the number of SME claims over the past year.

In total, small to medium firms claimed £905m in cash payments from HMRC in 2015/16. Alongside the large company R&D scheme and the Research and Development Expenditure Credit (RDEC), the figure handed out in 15/16 swells to £2.78bn. Average claim values are up across the board, too.

But despite these healthy statistics, Jenny Tragner, director at R&D tax credit consultancy ForrestBrown, still feels the scheme is being underutilised. “We see that day-in-day-out,” Tragner told AccountingWEB. “Either businesses just didn’t know about the scheme, or they thought they didn’t qualify. There are still a lot of companies that aren’t claiming that should”.

But Tragner, a member of HMRC’s R&D consultative committee, is satisfied that things are progressing. Specifically, many businesses are now repeat claimants. Tragner says companies are becoming more comfortable with capturing qualifying projects and expenditure, and are putting in place better processes.

“We’ve also seen the companies we work with start to change,” continued Tragner. “They are becoming comfortable with identifying what relief they are going to get year-on-year. They can now factor that into investment and day-to-day decisions.”

Another noteworthy morsel from the government statistics is RDEC’s second life as a tool for SMEs. The credit was initially designed for use by large companies, in particular businesses that missed out on relief because they were loss-making.

But the stats show that there’s been an 850% increase in the amount of relief claimed by SMEs using RDEC since its introduction in 2013.

With the number of SMEs now claiming under RDEC, Tragner says she’d like to see a move to simplify the landscape. “We have lots of complexity in terms of running two different mechanisms of relief,” she says. “We’d like to see the government simplify it by putting everyone onto the same model.

“Still have different rates, so you have more generous rates for SMEs, but  have the same model so people can get more comfortable with the different rules.”

About Francois Badenhorst

About Francois Badenhorst

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

Replies

Please login or register to join the discussion.

avatar
21st Sep 2017 11:30

We have had a number of calls in the last couple of years from people claiming that certain types of expenditure could be claimed as R&D even though they are nothing like it. They will sort it out with HMRC for a cut. Our accountants dismissed it pretty quickly. I don't think it's a coincidence that these companies abound and that take-up in the scheme has increased.

Thanks (0)
avatar
to The Rogue
16th Oct 2017 14:49

Whilst I'm aware these company's exist, is your accountant actually a specialist in R&D Tax Relief.

Thanks (0)
avatar
16th Oct 2017 15:47

My company is a stockholder. We buy metal and sell it. Sometimes we cut it up a bit. R&D does not form any part of what we do. Nobody needs to be a specialist in R&D tax relief to see that yet we get calls from the disreputable end of the R&D tax relief industry telling us we can still make a claim.

Thanks (1)
avatar
to The Rogue
16th Oct 2017 16:43

This is quite common with our client base.

We advise our clients to contact these specialists to see if anything they are doing is eligible for tax relief, even if we think that they're not, or where we think the actual R&D that they do is negligible. We then advise them of the risks of false/overstated claims.

Then we get the report from the specialists to incorporate into the Corporation Tax computations and at times it is highly questionable. Suddenly half the workforce (including the sales team, cleaners, book-keepers and administrators) has been involved in a major R&D exercise for the financial year which is not a scientific or technological advance, resolves no scientific or technological uncertainties, and could easily be worked out by a professional in the field. When all the company does is box-shifting or provides basic unskilled services.

And these reports are being prepared by some of the larger R&D specialist firms.

Is anyone really surprised when their fees are based on a percentage of tax saved. I wonder how their staff are incentivised?

I'm sure there are a lot of valid claims being made - it's just that based on current experience, around 75% are wildly overstated or nonsense and I get a little worried. But then I think of the lack of staff and experience at HMRC and I start to feel better.

Thanks (0)
avatar
to The Rogue
17th Oct 2017 15:58

I think in that case you're probably right, but they have probably bought some data that says your company is involved in the steel industry and therefore all companies involved in the steel industry must be involved in Research and Development. Right!

As long as your not developing any bespoke in-house software to help you run your business better, you probably won't be doing any Research and Development.

Unfortunately if you are on the receiving end, I can see how it might be a bit like being phoned and asked if you ever had PPI. It's why I get the majority of my clients through face to face meetings at tradeshows and exhibitions, by running informational sessions for tech start-ups and good old word of mouth and accountant referrals.

Thanks (0)
avatar
21st Sep 2017 12:44

Based on my experience of these fly-by-nights that are convincing all and sundry to claim R&D, am I the only one worried that this will be the timeline:

21 September 2017 - British businesses are using R&D tax credits at a record rate, according to the latest HMRC statistics. The data shows a 22% increase in the number of SME claims over the past year. R&D specialist companies taking massive cut but have assured everyone that they will defend any potential enquiries.

21 September 2018 - HMRC have finally reviewed the Corporation Tax returns claiming R&D tax credits and enquiries related to R&D tax credits are at a record rate. R&D specialist companies have been struck off.

21 September 2019 - Record levels of penalties and interest charged by HMRC in relation to the incorrect claiming of R&D tax credits.

Thanks (3)
avatar
to optimist
16th Oct 2017 14:32

As a qualified FCCA, who owns and runs a so-called fly-by-night, or as I prefer to call it a niche tax consultancy. There is perhaps an alternative timeline if the country continues down its more litigious route!

21 September 2017 - British Businesses are using R&D Tax credits at a record rate....

21 September 2018 - there has been a significant rise in SMEs taking reactive accountants to court for failing to recognise that their business had spent money on Research and Development that could have allowed them to generate up to 33.35% of their spend in tax relief.

For SMEs to survive they need to innovate, sometimes that innovation is coming up with a different way of doing something. It might not always be an advance in science or technology and in those circumstances it therefore won't qualify, but if it is, then accountants who don't have the expertise in house ought to, at the very least, know someone who they can refer their clients on to, if they are to be providing a proper service to their clients.

It generally takes an initial 10 minute phone conversation with a business to determine whether or not there is anything warranting a more detailed review.

It's not rocket science, just because you may not be confident in applying the rules to a situation that your client has, doesn't mean that it doesn't apply to them.

I don't need to convince all and sundry that they should be claiming, there is no point in filing a frivolous claim, because sooner or later you'll get found out.

In fact around half of my clients come as referrals from a pool of accountants who do understand that they don't have the expertise in house, but have been proactive enough to reach out to a specialist to get help and advice.

Unfortunately it's not just the SMEs who aren't making the most of their ability to claim. I was playing golf 2 weeks ago with a senior IT professional in a global IT business who said it was only 4 or 5 years ago they only really cottoned on to the extent of their ability to claim for the their R&D work.

If you'd like to have a conversation about it let me know!

Thanks (0)
avatar
21st Sep 2017 12:52

It would seem that R&D is - to an extent - the new capital allowances.

In much the same way as there are plenty of companies who will complete capital allowances claims for a cut of the cash you get back, there are plenty offering to do the same for R&D.

The trick is finding one that will still be here two years later when the whole fiction starts to collapse under HMRC investigation.

Thanks (0)
avatar
to gilderda
16th Oct 2017 14:38

It's possible there might be some who have disappeared, but four years into my niche tax consultancy and after 5 fairly detailed enquiries to some of my clients claims, I am perfectly happy with the work that we are doing for our clients will stand up to any further scrutiny.

Generally speaking if HMRC are in any doubt as to the veracity of a claim, they will enquire first before handing out the cash.

Being an FCCA who runs a niche tax consultancy, I'll still be here as long as the tax relief remains on the statute or I retire.

Thanks (0)
avatar
21st Sep 2017 15:48

How many HMRC CAs challenges have you see? Not many I reckon. This is the business model of these people i.e. relying on HMRC's incompetence/lack of resources to challenge these spurious claims. As said above, even if that changes, they will be long gone with the fees when that happens.

Thanks (0)
avatar
By Dib
to Justin Bryant
22nd Sep 2017 13:33

Whether it is R&D or CAs there are bound to be a few cowboys out there but the majority of these boutiques do a good job and fill a gap in the market allowing businesses to make the most of tax breaks which they would not otherwise realise were available to them. The boutiques compete directly with the Big 4/Top 10 and so have to be on their toes when it comes to claims.

For example Forrestbrown mentioned in the article are an established respected firm of CTAs which has won a shed-load of awards.

The fact that something is beyond your area of competence doesn't make it invalid.

I do not work for a boutique by the way.

Thanks (1)
avatar
to Justin Bryant
16th Oct 2017 14:46

Justin, sorry that's not the business model I recognise, the business model is being able to deliver a service that a customer isn't getting from an existing provider.

Fortunately, I don't want to deal with the compliance related work, so you won't lose your client who has a perfectly genuine claim if they came and asked me to prepare their R&D Tax Relief claim for them. However, there are other accountancy firms who do specialise in R&D who might take that really big audit client if they haven't been getting the right advice about how R&D Tax Relief could have benefitted their business. In that instance being reactive might be too late!

After 10 years in practice and 7 in Research-oriented industries, 6 in Clinical Research and 1 in Motorsport and several interactions with HMRC officers responsible for handling R&D claims, it makes me somewhat more experienced to run my own niche tax consultancy.

Thanks (0)
avatar
22nd Sep 2017 12:23

A very good article, and very good comments above... and below of course.

Thanks (0)
22nd Sep 2017 19:31

If the average small practitioner could be ars3d to find out about R&D they'd realise its not that complicated.

Understand your clients business and the legislation and apply the principles.

Lots of (correct) information can be gleaned from the internet if you know where to look and I'd highly recommend 'Research and Development - Maximising the Tax Relief' by James Boughton and Lindsay Pentelow.

We've been doing R&D claims for clients for the past 4 years and all have been successful. We always quote fixed fees and don't work on a commission basis.

This goes down well with clients and has led to a lot of referrals for R&D specific work and the compliance work tends to follow.

Thanks (0)
avatar
to Kent accountant
25th Sep 2017 15:57

This is great news. I've potential clients approaching me for this relief, so I'm beginning my journey with this.
I'm sorry to see many are sceptical about reliefs. I believe its worth trying as it can mean a great boost for IT businesses. Many clients struggle a lot and with some extra effort on my part this relief could help enormously.

Thank you for the heads up on the book. I'll give this a try.

Thanks (0)
avatar
16th Oct 2017 15:29

Francis, good article as Jenny says, the evidence continues to point to the fact that even with the increase in the number of boutique, niche firms specialising in R&D Tax Relief, between us, we are still only scratching the surface of the number of companies with the potential to claim.

Unfortunately the negative comments from some of the initial posts below from people within the profession who are often regarded as "trusted finance partners" by their clients and unfortunately in some cases the fonts of all knowledge financial, some of them remain poorly advised.

Thanks (0)