You have just received a cheque for a significant amount from the Government for doing your ‘day job’. Sounds too good to be true?
The Government wants to encourage innovation. One route is via R&D tax relief, which can generate a cash benefit of up to 33 percent of spend on qualifying R&D expenditure. So, for every £100 you spend, the Government writes you a cheque for £33. Also, cash-back is often available even where no tax has been paid over.
Companies need to carefully consider the benefits of R&D tax relief.
What is R&D?
The definition of R&D is much wider than many would anticipate. People may assume that they are not doing anything other than their normal ‘day job’. They are not trying to develop a cure for the common cold, nor are they building space-rockets. To qualify for this relief, there are two key criteria – seeking to make an advance in science or technology – and there must be scientific or technological uncertainty.
In the tech world, most claims relate to either improving existing technology or integrating technologies, rather than any ground-breaking new discovery. Examples of advances may include integration of a bespoke legacy platform with new emergent technologies; re-engineering an existing platform so as to handle significantly more data; or reduce costs of device build without impacting on performance (or even improve performance or add additional functionality).
Uncertainty may arise where there is no solution in the public domain and whereas you believe something may be possible, you don’t know how this would be achieved. You couldn’t claim uncertainty if the solution was readily deducible for example, when needing more capacity, just adding another server.
Technology never stands still. Even if you have developed something, there may be continual, on-going development to ensure that it remains fit for purpose and that a competitive edge is maintained.
Who can claim?
Any company with qualifying R&D can claim, although there is a deadline (two years from the end of the accounting period).
Start-up companies often require funding and would welcome any cash-back from the Government. Growing companies often look to re-invest any benefit into expansion. And established companies can always find a use for extra cash.
Qualifying R&D costs
Only certain costs qualify for relief. The main qualifying cost is staff costs (salary, employer NI, employer pension contributions but not benefits in kind).
Other costs can include certain external resource costs, consumables, annual software licences and utilities (light/heat/water but not others such as rent/rate/phone).
Many companies will already be successfully claiming R&D relief.
However, it is often the case that claims are not maximised. Sometimes, claims are only a fraction of what they could be.
Is making a claim easy?
In short, yes. HMRC wants to ensure that the regime is not overly burdensome. Of course, the higher the benefit, the more time you may need to invest.
In addition to R&D tax relief, there is another relief – patent box. This results in certain profits derived from qualifying patents being taxed at 10 percent, rather than the usual corporation tax rate. This can be claimed in addition to R&D tax relief.
With any patents, you need to ensure you have considered the wider commercial and legal implications.
If you are in certain sectors for example, film, high end TV, animation, video games, orchestra, theatre or museums, there are other tax reliefs that should be considered.
Some final thoughts.
The above tax breaks are not tax evasion. They were introduced by the Government to encourage greater investment in these areas.
RSM has extensive experience of assisting companies make successful and sizeable claims, for companies of all sizes and across all sectors (in particular technology). We would be delighted to have an initial, no obligation meeting to explore whether there is scope for you to make/improve claims.
Matt Appleton is a tax director at RSM, based in the Basingstoke office. Matt can be contacted on 01256 486863 or at firstname.lastname@example.org.
ABOUT THE AUTHOR
Tax Director | RSM