18 September 2012
Research and Development (“R&D”) tax relief is a Government approved incentive designed to encourage companies to undertake R&D. Based on recent statistics, companies in the Midlands may not be claiming tax relief they are entitled to.
HM Revenue & Customs (“HMRC”) have recently released information relating to the number of R&D claims made and the amount of relief that has been claimed by company’s since the R&D scheme began over a decade ago.
The information released by HMRC states that since the introduction of the R&D scheme in the 2000-01 tax year over 74,000 claims have been made with over £7 billion of tax relief being given, giving rise to an average tax saving of nearly £95,000 per claim.
For the first time, HMRC have also released information on the location of the businesses that have made claims. This information has revealed some very interesting regional trends and suggests that many companies in the Midlands are missing out on many thousands of pounds of valuable R&D tax relief. The figures released by HMRC show that last year over 4,250 claims were made in London and the South East compared to less than 1,000 claims in the Midlands. It is therefore likely that many Midlands firms are missing out on claiming R&D tax reliefs due to either their lack of knowledge of the scheme or a belief that their activities would not qualify for the relief.
It is a common misconception that in order to qualify for R&D tax reliefs a company must be undertaking highly technical ground breaking scientific research. However, this is not always the case; the definition of qualifying activities is much broader than perceived. Many owner managed businesses will be undertaking R&D every year to enable their business to stay competitive without realising that they could benefit from substantial tax reductions for doing so. For example, if a company has made their product smaller, lighter or faster, or have had to alter their product or one of their processes to comply with a new law or legislation, then this expenditure may qualify for R&D tax reliefs.
What are the qualifying criteria for R&D tax reliefs?
There are four main areas that HMRC state they will look at to ascertain whether R&D undertaken by a company would qualify for the tax relief, these are:
- Whether there has been a scientific or technological advance. HMRC state that the advancement should be in the overall knowledge or capability in a field and not in a company’s own state of knowledge or capability. It does include the adaptation of knowledge or capability from another field where this adaptation is not readily deductible. Making an appreciable improvement to an existing process or duplicating the effect of an existing process in a new appreciably improved way would also qualify.
- What the scientific or technological uncertainties were in the project. Uncertainty exists where knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice is not readily available.
- How and when the uncertainties were overcome. Even if the uncertainties were not overcome and thus the project is not achieved or fully realised, the R&D tax relief may still be available.
- Whether the knowledge being sought was readily deductible for a competent professional. HMRC state that the knowledge should not be readily deductible from publically available information or by a competent professional working in the same field. Work that seeks an advance relative to this overall knowledge or capability is R&D. In addition, if another company has the knowledge or capability being sought, but this information is secret to them, developing this knowledge would qualify for the relief. Similarly, where several companies are working at the cutting edge in the same field and are doing similar work independently this would also qualify.
What are the R&D tax reliefs?
There are two separate R&D tax relief schemes – a Large Company scheme and a Small and Medium Enterprise (SME) scheme. The SME scheme applies to companies with less than 500 employees and either annual turnover below €100m, or a balance sheet below €86m. The majority of Owner Managed Businesses will therefore qualify under the SME scheme.
Under the SME scheme, the current rate of additional tax relief is 125% of qualifying expenditure giving rise to potential cash savings of up to £30 for every £100 incurred; when the normal tax deduction is taken into account this rises to £54. Companies can therefore benefit from substantial tax savings by making an R&D claim.
Loss making companies are able to claim an R&D tax credit instead of the increase in trading loss in order to receive a cash repayment from HMRC in relation to their R&D activities. Such companies are able to claim a cash repayment of up to £24.75 for every £100 of R&D expenditure incurred.
What costs qualify?
The following costs are allowable when calculating R&D relief claim:
- Employee costs in relation to employees directly involved in R&D activities
- Agency staff directly involved in R&D activities
- Materials and consumables directly related to the R&D activities
- Utilities such as fuel, power and water
- Software used directly in R&D activities
- Subcontracted R&D expenditure (subject to special rules)
In addition R&D Capital Allowances are available at a rate of 100% for capital expenditure that is used in the R&D activities.
How can Magma help with R&D claims?
We have a wealth of experience in advising clients in making claims for R&D tax reliefs and have successfully agreed and obtained numerous substantial tax reductions and repayments for companies under the scheme. We have also assisted companies in successfully defending R&D claims with HMRC so as to secure the beneficial tax treatment.
We are able to advise companies on whether their activities would qualify for the relief, and if so, identify qualifying costs to ensure that any claims potential is maximised. We are able to fully handle the claim process with HMRC on a company’s behalf, using our experience to ensure that the claim process runs as smoothly as possible whilst minimising the time and effort in making any claim.
If you think your company may qualify for R&D tax reliefs, or would like to discuss the scheme, please contact us on 01788 539000.
Magma is a leading firm of Chartered Accountants and Chartered Tax Advisers, providing a wide range of professional advisory services to owner managed businesses and private individuals. Magma thrives on its work with entrepreneurial businesses and their people. Magma works closely with its clients, delivering proactive and innovative advice. Our focus is on building long term relationships with our clients to help them and their businesses succeed, reduce taxation and create, increase and protect wealth. Magma offers a breadth of technical expertise and specialist advisers across six integrated service areas: Audit and Assurance, Business Services, Corporate Finance, Corporate and Business Tax, Private Client Tax and Wealth Management.
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