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With UK R&D spending rising, why aren’t tax relief claims keeping pace?

The last 18 months have not been easy for businesses as mounting fears over the fallout from Brexit have led to investment delays and economic stagnation.

Despite this the latest government figures for gross domestic spending on research and development (R&D) tell a not altogether gloomy tale.

Spending on R&D actually rose by £1.6 billion to a record high of £34.8 billion in 2017, an increase of 4.8%, which was well above the long-term average of 4.1%. It was also a higher increase than in 2016 when spending grew by 4.3% to £33.1 billion.

So far, so good.

However, a closer look at the figures shows foreign funding has been steadily draining away for the past three years. It cannot be a coincidence that this timing aligns with the most politically unstable period Britain has experienced in years.

With the likelihood of a delay of Article 50 meaning potentially many more months of uncertainty ahead, businesses need to look for ways to future proof themselves and boost their revenue streams in every way possible.

R&D tax credits are one clear route by which businesses can do this, yet it seems many businesses are not taking advantage of this potential cash boost. Our own research shows that nearly eight in ten SMEs in the UK are likely to be eligible for R&D tax relief but up to 55% of them are not claiming.

A conservative estimate would be that two thirds of Britain’s 5.7 million SMEs are actively trading, equating to approximately 1.6 million small businesses who are missing out on this valuable relief.

With the average R&D claim worth £51,000, small businesses could be missing out a massive £82 billion each year. This is money that could be reinvested in British businesses to fuel further growth and innovation at a time when our economy really needs it.

So, why are so many businesses failing to claim the R&D tax credits they are entitled to?

The primary reason we stumble across again and again is that businesses simply do not realise they are eligible for R&D tax credits. Too many business executives still associate R&D with scientists in laboratories when it actually encompasses a vast range of industries and projects.

Introducing R&D tax credits in 2000, the government’s aim was to reward and encourage greater innovations across multiple sectors.

HMRC was therefore careful to ensure its definition of R&D was as inclusive as possible, describing it as work that seeks to resolve a ‘scientific or technological uncertainty’. This can take the form of a new process, product or service, or simply be an improvement to an existing one. The R&D work does not even have to be successful to qualify.

We see successful R&D tax credit claims across dozens of sectors from farmers trialling new animal feeds to building companies using new materials and software developers designing new data management techniques. This is just a small snippet.

So, as part of their regular accounting and financial reviews and forecasts, all businesses should also take a proper look at their R&D tax entitlements – and seek professional advice on what qualifies. They’ll probably be pleasantly surprised.

This brings us on to the other major obstacles to companies claiming R&D — firstly, that they do not know how to go about claiming the tax relief and secondly, they fear that the process will be too time consuming and costly to be worth the effort.

R&D tax relief claims are made up of a calculation of qualifying costs, such as staff time and materials used in the course of the R&D. There are stringent rules about what does and does not qualify so it is easy to get it wrong which is why most companies call in professional help to oversee the claims.

However, this does not need to incur big upfront costs, with most reputable tax advisers willing to work on a contingent-fee basis. Since most claims bringing in tens of thousands of pounds each year, this provides a significant boost to a company’s bottom line and is worth doing.

R&D tax relief consultants should work closely with company accountants to ensure tax relief claims are a standard part of business’s overall financial planning and records. To this end, Catax has maintained a strategic partnership with the ICAEW in 2013.

A widespread lack of knowledge about R&D tax credits, who can claim, how and what they are worth is preventing UK companies capitalising on their innovative work. Tax relief may not be the most exciting thing that a fast growing SME has to deal with, but done well, it can be the difference between a firm’s success, stagnation or even failure.

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