More Companies Claiming R&D Tax Credits Than Ever Before
Since its inception, the R&D tax credits scheme has provided over £15bn of R&D funding support to UK businesses. These tax credits have increased significantly since they were launched. Today UK businesses can obtain a 26% rebate on their R&D expenditure. This can rise to 33% for loss-making businesses.
Although more UK companies are claiming these tax credits than ever before, many companies are still missing out. R&D tax credits are not just for companies working in scientific industries, such as robotics or pharmaceuticals. If your company is working on advancements in any field of science or technology, you may be eligible for R&D tax relief. As long as your research and development work involves resolving scientific or technological uncertainties, it will most likely qualify.
While the article here is specific to the UK, R&D tax credits are available in more than 40 countries around the world. Could you be missing out? Read on to find out more.
How Many Companies Are Claiming R&D Tax Credits from HMRC?
HMRC’s latest statistics for R&D tax credits are for the 2014-15 financial year. The total number of claims for that period was 22,445, with 18,630 claims under the Small and Medium Enterprise (SME) scheme, an increase of 16%.
How Many Other Companies Are Eligible to Claim These Tax Credits?
The Department for Business, Innovation & Skills has provided business population estimates for 2015 showing that there were 1.3 million employing businesses, with 73,035 employing businesses in the “Information and Communication” sector. If 20% of businesses in this sector—over 14,5000—are eligible for R&D tax credits, there are over 9,000 businesses that are eligible to claim this tax relief but are not doing so.
What R&D Expenditures Can Be Claimed?
The main areas of costs that can be claimed are:
- Staff costs (gross pay, employer’s National Insurance contributions, and employer’s pension contributions).
- Agency workers/externally provided workers.
- Sub-contractors/freelance workers.
- Software licence costs.
- Consumable items (materials or equipment used or transformed by the R&D process).
What Types of Digital Innovation Projects Qualify for These Tax Credits?
Common types of software development and digital innovation projects that may qualify for R&D tax relief include:
- State-of-the-art software for new projects, or new functionality for existing R&D projects.
- Tools to extend the functionality of software applications or an operating system.
- Extensions to database software, programming languages, or operating systems.
- Software development tools, such as tools to port data across platforms, and tools for image processing and character recognition.
- Novel data management techniques, such as new object representations and new data structures.
- Innovative methods of capturing, transmitting, manipulating, and protecting data.
- Software to run new computer hardware.
- Software to run on devices with pre-installed operating systems, such as handheld GPS, mobile phones, and tablets.
- Means of integrating hardware and software platforms.
How Do You Ensure that Your Company Is Maximizing Its Full R&D Tax Credit Entitlement?
There are several key ways to ensure that you maximize your R&D tax credits claim.
Know what sort of projects qualify for R&D tax credits.
Many businesses don’t realize that they are undertaking eligible qualifying activities. If your technical lead (the R&D manager, lead engineer, or lead developer) is struggling to overcome the technical challenges of your project, your project will almost certainly qualify for R&D tax credits.
Know what the criteria for these tax credits are.
In addition to being able to claim for projects that are obviously breaking new ground, you can also claim R&D tax credits for projects aimed at making an appreciable improvement to existing technologies.
Remember to claim for indirect staff who are involved in R&D projects.
Your R&D project team may include the R&D manager, a lead developer, engineers, project coordinators, quality control and testing specialists, cost accountants, admin support staff, and members of the senior management team. You can claim for each of these roles in proportion to the amount of time they spent on your projects.
Ensure you are claiming for all eligible costs.
It is not uncommon for claims to miss including freelance contractors who are actively involved with the project. You can also claim for overseas contractors. This includes subsidiary costs, as long as those costs are included in your profit and loss account.
Follow a team approach when preparing your R&D tax credits claim.
It is best to take a team approach when you prepare your R&D tax credit claim. This helps ensure that you capture all eligible projects, costs, and people that have been involved in the qualifying R&D activities. The best person to lead the claim process is often the technical lead, rather than a member of the finance team. This is because the first and most important step in making your claim is identifying all your eligible projects.
R&D tax relief is designed to reward innovation, which is vital to a country’s economic prosperity. If your company has been tackling innovative projects but hasn’t yet claimed R&D tax credits, there’s no better time to make your claim.
About the Author
Lauren Olson is a Technical Consultant at Myriad Associates, a leading R&D tax credits and grant funding specialist.