The government’s Research and Development Tax Credit Scheme is designed to reward UK companies that invest in innovation. HMRC has awarded over £16 billion to forward-thinking businesses since 2000—a ﬁnancial windfall used to support new ventures, investment in new equipment and the employment of more skilled staff; ultimately fuelling business growth.
It is a fact that for any economy to thrive, innovation is a critical element. In fact, the EU itself has stated that in order for an economy to grow, a minimum of three percent of a country’s total GDP should be reinvested into research and development. So, with concerted efforts being made to stimulate the UK’s lacklustre productivity levels to drive better competitiveness, it is clear that a commitment to innovation will be essential for a prosperous economy going forward.
The R&D Tax Credit Scheme
The UK government has, for a number of years, recognised the value that innovation delivers. The R&D Tax Credit Scheme incentivises and rewards both large and small companies that are prepared to invest in innovation. Put simply, this means that an organisation incurring costs in developing new and improved products, processes or services can receive a cash payment from HMRC via a tax credit or a tax reduction. In reality, this results in an often signiﬁcant cash injection back into a business or reduced liability on tax bills: cash that can then be reinvested to support new business ventures, further equipment investment or employ a greater number of skilled staff.
Some of the work being undertaken by UK companies is breathtaking in its ambition and complexity, and should rightly be recognised as such. R&D tax credits aim to do this, though only a small percentage of businesses are currently taking advantage of this scheme. With around 25,000 qualifying companies having made a claim under the scheme, and with estimates of the existence of 750,000 tech based UK companies, it is clear that many have yet to investigate a scheme that can deliver real value back to a business.
The tax break principles of R&D tax credits reward and stimulate innovation. The simple way to assess whether activities qualify is to examine activities in a business focused on developing new services or products, often to meet a new market or customer need. Efforts to think outside of the ordinary, projects that fail, but with the lessons learnt, go on to succeed through the development of a new product, service or process. The journey to their creation—not the standard steps—are what will entice HMRC to reward pushing the envelope.
Some examples where organisations can demonstrate qualifying activities include the time a company spends on a R&D project, the costs incurred using specialist subcontractors, items that are ‘‘consumed or transformed’’ by the R&D process, and components purchased to construct a prototype, as well as software used as part of the project. It is vital that all such activities and investments are not missed when compiling an R&D tax credit claim. There is no limit on the amount that can be claimed, and typically organisations can recover up to 33% of qualifying costs, even if the company is loss making. In fact, HMRC ﬁgures from 2015–16 show that the average claim value under the scheme was £109,500 – a substantial addition to a business’s bottom line. It is safe to say that for a number of companies the ability to obtain a cash injection thanks to tax credits has been a lifeline. Not only has it supported them when ﬁnancial pressures have been intense, it has also provided the funds to help the company expand and grow.
The Future for R&D Tax Credits
The outlook for the scheme is positive. Recent pronouncements indicate that the government remains committed to the scheme, with the 2017 Budget committing an extra £2.3 billion for R&D investment. The latest allocation, which will focus on artiﬁcial intelligence, full fibre broadband and 5G mobile networks, indicates the government is determined that the UK remains a country where innovation is both recognised and rewarded. Furthermore, all changes made to the scheme’s qualifying criteria, certainly over the last decade, have seen increasingly generous allowances made. Though underused, it remains a well-known if not entirely understood scheme, when compared to the rules and regulations surrounding other currently available grant and loan processes.
Continual and increased promotion of R&D tax credits would be helpful to alert ﬁrms not familiar with the scheme. Limited resources at HMRC make this a challenge, but if stakeholders such as ﬁnancial advisors and accountancy ﬁrms increased efforts to better understand the beneﬁts for their clients, then claim levels would certainly rise. It’s really about advisors securing knowledge of the scheme to ensure their clients receive all the tax breaks to which they are entitled—including R&D tax credits.
Finance professionals will undoubtedly be aware of the many grants, incentives and loans available for innovating companies. However, the complexities of working in accordance to stringent HMRC guidelines can make producing a compliant claim difﬁcult. However, in the years ahead, with the right specialist support,even more of the country’s innovating businesses can also proﬁt. The R&D Tax Credit Scheme is a prime example of where government can make a difference on the ground. The thousands of organisations which have, to date, seen the beneﬁt of a successful tax credit claim, would certainly agree.
Mike Price, Director at MPA
This article first appeared in Bloomberg BNA Tax Planning International Review, December 2017 edition