How unrealised R&D tax credits can boost the bottom line

Recently published HMRC figures showed an impressive increase in the take up of R&D tax credits over the past year. However, peeling back from the headline figures, a different picture starts to emerge. While awareness and take up is good among large companies, it remains patchy and inconsistent among SMEs and within certain sectors. It is vital that accountants understand the complexities of what can be claimed for, with the potential for a significant cash boost to be realised. R&D tax credits Introduced in 2000, the R&D tax regime is the Government’s scheme to boost the innovation capital of the nation. The scheme enables companies to reduce their corporation tax bill or receive a tax refund based on a proportion of their R&D spend. This is up to 26% for profit-making smaller companies of up to 500 employees and 12% for large companies. As well as helping cashflow, the relief creates a pool of innovation resources for re-investment. The scheme also applies to loss-making companies with 33% of qualifying activity claimable. Any losses generated by the scheme can be surrendered directly for cash. The trouble is many companies are unaware about what counts as R&D or are underclaiming. Defining innovation Research and development, as defined by the government, covers a broad set of activities, including products, processes and computing. This can be improvements to existing methods or the development of new methods. As well as being something that can achieve an advance in overall knowledge or capability in a particular sector, it can also refer to the backend processes that support it. This is something often overlooked by inhouse accountants. Examples of claimable technological developments that are often unrealised include: Developing or integrating different technical systems for improved performance or additional features, for example CRM systems, ERP systems and SAS systems; Building web frameworks and software packages for improved security and scalability and cloud computing and large-scale data management. Poor awareness among SMEs The most recent HMRC statistics reported that £1.8bn of tax relief was claimed against £31.3bn of research and development expenditure during the 16/17 financial year, up 20% year on year. The Government wants to boost this number further and has pledged to increase the claimable amount for the large companies scheme from 12% to 13%. On paper this looks good. However, arguably by focusing here, they are already preaching to the converted. Awareness is already well embedded within big companies. More action should be taken with smaller companies, where the benefits are more significant for the bottom line and the awareness is far lower. Data from the most recent figures shows that particular industries like architecture and agriculture are falling behind as they simply don’t realise that a lot of their work counts as R&D. Firms in agriculture claimed just £25m on £140m of expenditure last year. To put this into context, the top performing sector, manufacturing, claimed for over £1.25bn. Similarly within architecture and housebuilding, there were 2,025 claims for construction and just 215 for real estate, generating just £145m in income. Analysis of the missing claims Our own analysis, based on our own claims data combined with HMRC guidelines, indicates that a qualifying UK company employing 500 people and investing 4.25m on research and innovation could claim up to £1.1m in R&D tax relief, while an SME employing 100 people and investing £1m in R&D could claim up to £225,000. This is a huge amount for an early stage company. Sectors with the highest potential for tax relief include Chemical Formulation, Nano Technology and Pharmaceuticals (up to 26%), Robotics, Subsea and Aerospace engineering (up to 21%) plus AI, Big Data, and Fintech (up to 22%). Root and branch approach Part of the challenge is that entirely internal accountant-led processes have been shown to realise less benefits in something as specialised and technical as R&D. Larger firms may have the inhouse expertise but the same isn’t the case with smaller companies. It is the reason a host of specialist firms were set up to specifically focus on this regime, embedding themselves with businesses to conduct a root and branch assessment of what companies can claim. Many companies have seen this as a better way of accruing the benefits of the schemes. By really engaging with the regime and the complexities of what can be claimed, the benefits can and should be fully realised. Radeep Mathew, Head of Consulting, Leyton UK