Many innovative startups and SMEs are under the impression that claiming for research and development tax credits are too difficult or costly to be worth the rewards. In fact, the average R&D tax claim for London SMEs is £81,000, so it’s always worth finding out if you can claim.
EmpowerRD, backed by Forward Partners, has been disrupting the R&D tax credit space since their launch last year. Their combination of technology and expertise is helping users submit R&D claims at a fraction of the price charged by the established advisory community. They have been immensely pleased with the uptake since their soft launch and have worked with companies across all sectors. With a 100% success rate, responses have been phenomenally positive: ‘EmpowerRD made it quick, straightforward and cost-effective’, demonstrating the value entrepreneurs felt was being lost in using traditional channels.
Before the accounting year ends in March 2018, consider these 5 crucial first steps.
R&D tax claims… don’t switch off. It’s not PPI insurance! These are a wonderful incentive provided by the UK government to spur innovation in the UK (especially important given the current Brexit-related uncertainty). It means that for activities, and their respective costs, related to research and development you could get back 33p on every £1 of investment. 15,000 SMEs take advantage if it every year but, surprisingly, there are still tens of thousands of businesses that could claim but don’t. We suspect it’s one of too things: lack of clear guidance on whether they qualify or believing the value may be too restrictive and therefore of limited value to them. We’ve identified below 5 key points to address if you’re coming to your financial year end.
1. Check if you’re eligible for R&D tax credits
The scheme is remarkably inclusive and a wide range of UK companies are eligible for either a cash payment or a corporation tax reduction if they spend money on researching or developing an advance in their field. Companies in any sector can be eligible, however sectors where R&D is most frequently undertaken include: software development, manufacturing, engineering, construction and pharmaceuticals. For the purpose of tax credits, R&D must meet the HMRC – defined criteria that you were: 1. Seeking to create an advance in the field of science or technology, and 2. Overcoming scientific or technological uncertainty in order to achieve this. But that doesn’t mean your technology needs to be of cutting-edge variety. This R&D credit is aimed at incentivising novel technical or scientific activity within commercial organisations, not University / academic research.
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Research and development reliefs can benefit businesses in various different fields, particularly science and technology. Improvements to previous projects can be included, and even if a project didn’t launch, it can still be claimed for if the aim was to solve a significant industry-wide problem.
2. Choose the right projects to claim for
The best projects to showcase are those that aim to overcome a significant tehnical / scientific obstacle in your industry – the bigger (in terms of cost / duration) the project the better, because it maximises the coverage of activity undertaken during the year. ‘Science and technology’ can mean a huge range of sectors and disciplines, so there’s a lot of flexibility.
If you’re unsure whether one of your projects would meet the criteria, it’s smart to get some initial advice from an advisor. Calling HMRC may not give you a clear-cut answer; they’re not set up to make those kinds of judgements over the phone. EmpowerRD have a 100% claim success rate, in part because our industry experts help ensure you identify the projects that tick all of HMRC’s qualification criteria.
3. Look back over the last 2 years – you can still claim for those projects
Many assume they can only claim for the previous tax year, but they can actually claim for projects further back than that. If eligible, you can typically claim R&D tax relief for your last two completed accounting periods. In other words, while in your 2018 accounting period, you could still claim for your 2016 and 2017 R&D tax credit.
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According to HMRC guidelines, a project starts as soon as the technological / scientific uncertainty begins and ends when “the uncertainty is resolved” or work towards it stops. This can be when your business has a prototype, a process ready for testing, or even come to the decision that the project isn’t viable. In any case, although the project needs to have started / be underway during the periods you’re claiming for, it doesn’t have to be completed before you can claim for it.
4. Consider how grants / funding from customers might affect your claim
Having received grants during a claim period doesn’t mean that you’re not eligible to claim for the R&D credit. You may not be able to claim under the more lucrative SME scheme (worth up to up to 33% of qualifying costs) but you should still be able to claim under the RDEC scheme (worth 11/12% of qualifying costs). This means that for projects funded by grants received from UK (Innovate UK) or other State organisation (Horizon 2020) you should still be in a position to file an R&D claim. Helpfully, the non-grant funded technical / scientific projects that you undertook during the year can still be claimed for under the SME scheme.
The same applies to projects / developments that you might have undertaken that were financed through funds from customers (for example, any work that is sub-contracted to you). R&D credit can still be claimed for these ‘Customer-funded’ albeit under the RDEC and not not the SME scheme. The non-customer-funded technical / scientific projects that you undertook during the year can still be claimed for under the SME scheme.
5. It helps to maintain the necessary records to support your claim
When your advisor asks for evidence to support your claim, you’ll need to be able to assemble it fairly quickly, particularly if you’re coming to the end of your 2-year period. Evidence is crucial for your claim, so it needs to show a clear picture of all your relevant expenses. Although it doesn’t need to submitted with your Claim it is important to have it to hand should HMRC have any questions.
If you’re unsure what evidence you need to gather from the past couple of years, we’ve provided you some guidance. Generally you’ll need to prove the costs of hiring staff and subcontractors, building prototypes, and any software or materials purchased, but this isn’t an exclusive list. Costs related to activities that either directly or indirectly impact the R&D project can usually be included and, therefore, you should retain the supporting evidence.