The lucrative world of R&D tax credits explained

Introduced in 2000, the Research and Development (R&D) tax credit scheme is one of the best tax-delivered incentives in the UK. It is designed to stimulate innovative activity in manufacturing and technology to maintain the UK’s world lead in industrial based R&D.

Despite year-on-year increases in uptake, the scheme is still massively under-utilised. Since 2000, around 170,000 claims have been processed, at a value of £16.5bn in R&D tax relief from HMRC. However, many more thousands of companies aren’t claiming, with billions in relief remaining unclaimed since the introduction of the scheme.

What are the benefits?

The benefits of the programme include increased cashflow, which is especially important to small, developing companies. It also encourages development of a corporate philosophy that embraces innovation and improvement.

Small and medium sized enterprises (SMEs) can deduct up to 230% of qualifying expenditure when calculating their profit for tax purposes. Therefore, where an SME brings expenditure of £100,000 on qualifying R&D, it can deduct £230,000 when working out its taxable profit, or loss, for corporation tax purposes. In smaller terms, that’s the equivalent of your company getting between 24.7p and 33.35p, depending on company’s financial situation, from HMRC for every £1 spent on R&D activities. What’s more, you can claim R&D tax relief on expenditure that’s up to three years old. The precise value of the tax credit will depend on the size of your company, its tax rate and how many of your activities are eligible.

Do you qualify?

A common misconception is that the scheme is just for companies with R&D departments and men in white coats. The fact is that any company that spends money trying to improve a product or service through a technological advance, using qualified staff and appropriate project controls, and where there’s doubt about the project’s success, is likely to be eligible.

Eligibility is judged on three criteria: project content, advancement in science, and technological uncertainty. The project content must be technical i.e. science- or technology-based. The project must also contribute to technological advancement within its field. It doesn’t have to be a large advance; it just has to be shown to be defined and above the industry standard. Finally, and possibly most importantly, the project must possess uncertainty that prevents a guarantee of success.

All companies, large and small, can claim if they undertake qualifying work. SMEs can benefit even if they are loss making – they can surrender the R&D tax losses for cash. This is of considerable assistance to early stage innovative companies in need of cash to fund their development activity. It means that innovative, risk-taking small companies are given a boost that may mean the difference between failure and success.

How do you claim?

The quickest way to determine eligibility is to speak to a specialist R&D tax credit consultant such as Jumpstart. The accountant route is often assumed to be the logical choice because it is seen by many as a tax process. The reality is that, if the claim is prepared properly, 80% of the claim narrative is technically focused. There are some things that accountants are best equipped to manage on behalf of their clients and logically these are accounting based.

The great majority of accountants are not technically knowledgeable and will not understand the technology and science behind what you do, how you do it, the context of your projects and known industry alternatives. This makes it difficult for most accountants to clearly define what activity is eligible for relief under HMRC’s guidelines and what isn’t. As a result most accountants generally submit conservative claims that are largely under the legitimate entitlement for the client or can be technically weak and easily challenged or overturned by HMRC.

The key is to identify as much eligible expenditure as you can; the more you identify, the greater the value of the relief you’ll receive from HMRC. So the ideal partnership to deliver the best results for any client is the combination of a specialist technical R&D tax relief advisory firm such as Jumpstart, who speaks both your language and HMRC’s; and your accountant. In collaboration they can manage the assessment, preparation and submission on your behalf, ensuring you receive the biggest return for the least possible effort.

Jumpstart is a leading R&D tax relief specialist, guiding companies through the complexities of submitting claims to HMRC.

Jumpstart’s large team of technical analysts have specific scientific and technical backgrounds and years of industrial experience which have resulted in an extremely high success rate in securing R&D tax relief for their clients. Since inception ten years ago, they have realised over £100 million benefit for their clients. Right now, they’re submitting an average of 500 claims per year to HMRC.

To arrange a free consultation to discuss your own R&D tax relief specific circumstances, to identify how we can work with your team to improve the claim process and realise greater value for your business, contact the Jumpstart team on 0131 240 2900 or [email protected].