Any new business needs all the tax relief it can get. Which is why it is all the more surprising that for many SMEs, the government’s Research & Development Tax Credits aren’t being more widely utilised.
What activities qualify for Research & Development Tax Credits?
HMRC has clear guidelines about qualifying criteria and they are much broader than you might expect:
- Expenditure on staff (salaries, employer’s NIC and pension contributions all count).
- Expenditure on subcontractors (including freelancers).
- Spending on materials and consumables (including heat, light and power that are necessary to, or used up by, the R&D process).
- Even some types of software expenditure.
It’s important to note that your project doesn’t need to succeed to qualify for tax savings. You can reduce your tax by applying for Research & Development tax credits even if you’re not certain if the project is possible, scientifically or technologically. Or if it’s theoretically possible but you’re not sure if you can put it into practice. HMRC calls this ‘resolving uncertainties’ and this qualifies for Research & Development tax credits. In fact, so does enhancing an existing product, process or service. As long as that enhancement requires an Research & Development spend.
Another surprising aspect of the tax relief process is that an SME that is undertaking work for a client, for example a software developer creating a bespoke programme or application, can apply for the Research & Development tax credits. Even if they themselves won’t be the final beneficiary of the research process.
Research & Development tax savings
Research & Development tax credits can be worth as much as 33 pence in every £ of qualifying expenditure. It is mind-boggling that tech companies, in particular, aren’t taking them up more. The industry sectors that made successful R&D Tax credit claims in the 2014/15 tax year were dividing into:
- professional, scientific and technical
- information and communication.
On digging deeper it emerges that ‘information and communication’ had 5,165 successful Research & Development tax relief claims in that period. The information and communication sector in the UK in the same period had 73,035 employing businesses. This means that if just 20% of those businesses were eligible for the Research & Development tax credits then around 8,500 businesses in this sector, could have been eligible for the tax savings, but didn’t claim them.
If this sounds like your business, don’t despair. If you’re eligible, then you’re entitled to claim the tax relief for your last two completed accounting periods. Therefore if you’re currently in your 2017 accounting period you can claim for both 2015 and 2016. If you’re out of your 2017 accounting period, you can still claim for 2016.
What is HMRC looking for in a Research & Development Tax Credit Claim?
HMRC likes clear evidence. So if your start-up is fairly new, it’s worth structuring your records to ensure that your Research & Development Tax Credit claim is straightforward. Being able to provide evidence of costs drawn from spreadsheets that clearly show time spent of specific projects is ideal. Of course that may not be possible and HMRC still looks kindly on more anecdotal material. It is worth considering upfront how to record your Research & Development spend so that you can easily make a Tax Credit claim.
To increase the likelihood of a successful claim ensure that the submission is prepared carefully with all of the key elements included. If you need support with this please contact us and we will make sure that you maximise the probability of a successful claim.