R&D tax reliefs
It has consistently been our experience that organisations dismiss these reliefs, on the basis that they do not think they qualify as they “don't do proper R&D” or they do not account for it as such. However, the HMRC definition of R&D is surprisingly broad and not restricted to the invention of a cutting-edge new technology or the work of scientists in lab coats.
Most industries can benefit and companies are surprised at what can qualify as R&D. Recent statistics published by Parliament in January 2020 bear this out showing a wide spread of industries featured in the top claimants of R&D for 2018 that included companies in pharmaceuticals, communications, aerospace, food production, oil and gas, automotive and banking sectors.
Has your business made some sort of technological improvement to a product or process that did not have an immediately obvious solution when you started to investigate how to change it and finally there was genuine uncertainty about whether/how the advance could be achieved? If so, then there should be a basis for an R&D claim. Indeed past failures to change products or processes are often a good indicator that R&D exists, even if it is not called that.
How we can work with you
At Mazars, we see possible claims all around us, for example those companies completely changing their production to meet NHS shortages or other high demand products; businesses who are having had to reconfigure production lines or manufacturing methods to accommodate social distancing and supply chain shortages; retailers having to improve their digital and logistics offerings to adapt to quickly changing shopping habits; banks and financial institutions having to work harder and smarter to deal with the flood of cybercrime and all organisations having to contend with system, communications and IT difficulties that result with remote working; and medical research companies endeavouring to create tests, vaccine or cures, and then having to manufacture those remedies in bulk quickly in a global economy where everyone is looking for similar solutions. There is undoubtedly large-scale R&D occurring everywhere in the UK as we all grapple with the effects of Covid-19.
Different R&D credit regimes
There are two R&D credit regimes, which both share the same definition of what advances qualify as R&D. The SME R&D relief is for companies who have less than 500 employees and turnover less than €100m or a balance sheet less than €86m). Those companies get a super tax deduction for their R&D at 230% for every £1 spent, and losses generated by R&D tax credits can be surrendered to HMRC for cash at a rate of 14.5%. Research and Development Expenditure Credit (RDEC) is a direct contribution of 13% from the Government more akin to a grant than tax relief and can be repaid if the claimant is loss making. The extra benefit of RDEC is that it is booked as a reduction in operating costs, not tax and thus also helps to improve underlying profitability.
In addition to the R&D credit regimes, capital spend on R&D can also qualify for 100% capital allowances, and where the research gives rise to a patent, future profits attributable to that patent are effectively taxed at 10%.
Each of these reliefs and incentives have a two-year claim window, so having discovered that you have done R&D in the current financial year, you can revisit the position for the last two accounting periods too. All of these incentives either give rise to cash tax savings, and in some cases actual cash back, so are invaluable in these unusual times.