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Are you entitled to R&D tax relief?

Each year around £2bn is claimed in research and development (R&D) tax relief but many SMEs don't know what they are entitled to

Are you entitled to R&D tax relief?

There's a perception among many SMEs that only something entirely new, and created by white-coated scientists in a laboratory, can qualify for R&D tax relief. It's an unwarranted assumption that means companies are missing out on the possibility of claiming up to 26% of their R&D costs, a figure that rises even higher to up to 33.35% if the company concerned is loss-making (Haines Watts, June 2018).

Martin Brown, founder of business advisors Elephants Child, says: “R&D tax relief is an excellent scheme but our experience is that many SMEs don't know about it or assume they're not eligible before they actually explore what the criteria is."

Qualifying activity

He adds: “SMEs will be surprised at the range and diversity of activity that is covered by the eligibility criteria. There could be huge numbers of companies claiming for this. If they did, I think the total sum paid out each year could be four or five times the £2bn paid out now, each year." In fact, any company undertaking R&D, that seeks to achieve a technological advance in a project with a reasonable amount of uncertainty, can claim - even if that project proves unsuccessful.

The project must relate to your company's trade - either an existing one or one that you intend to start up based on the results of the R&D. Your project may research or develop a new process, product or service or improve on an existing one.

Martin says: “One of our clients was able to claim around £42,000 per annum - a significant amount of money for an SME. Our advice to SMEs is that this is a claim well worth making, so long as they work with a specialist provider, who will work for a fee or sometimes a contingent fee. That provider will fully understand the R&D tax relief criteria and what a tax relief submission needs to look like. If you get the submission right, a claim can be processed in as little as six weeks."

Investing in your company

Simon Bond, Managing Director at cloud solutions experts Cyan Solutions Ltd, admits his company “had no idea” it could claim R&D tax credits. “I had heard other businesses in our sector were taking advantage of the credits, but I didn't know we could apply.” Outside guidance for the claims process saved time and resource and eventually meant Cyan qualified for approximately £14,000 tax relief. Simon says the company has been able to invest the money saved into new cyber security services to offer its clients.

At conveyor and automation system manufacturers LAC Conveyors, CEO Chris Unwin says his company had had several cold-call offers to help process R&D tax credit claims in exchange for a cut of the money saved. “At first we thought it might be some kind of a scam.”

But after advice from its bank and a major accountancy firm, the company now claims R&D tax relief on between 10-15% of its annual activity. “The credit has allowed us to design and develop a new-to-the-marketplace robotic pick-and-place machine, along with a new website and marketing literature,” Chris reveals.

An SME with less than 500 staff and a turnover of under €100m, or a balance sheet total under €86m, can claim R&D relief. It allows companies to deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction.

On average, SMEs are already claiming £46,000 R&D tax relief each per year (Myriad Associates, June 2018). R&D tax credit claims, which can be applied to R&D costs going back two financial years, are monitored and processed by HMRC. The R&D tax relief claim includes providing relevant information on the company tax return. Typically, if your company is making a claim for the first time, it will most likely be checked at by an HMRC Inspector before any tax relief is given.

​The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.