Are you missing out on research and development (R&D) tax relief?
Research and development (R&D) tax relief incentivises UK companies to invest in developing new, or improving existing products, processes or services, devices and materials but Dave Smith, our tax manager, says in his experience many companies need to consider if they are missing out on the advantages this relief can provide.
Under the SME (small-medium enterprises) scheme an enhanced tax deduction is given in addition to the amount spent on qualifying R&D expenditure which could be worth an additional 24p for every £1 spent. Alternatively if the company is loss making, losses can be surrendered in return for a cash refund of 14.5% of the losses.
The track record of our team at Meston Reid & Co, which places a premium on effective communication with clients, is testimony to the success of its approach with a 100% record of successful R&D tax relief claims from the first one in 2002 right through to those in 2018.
The first step is to identify projects that meet the criteria. Companies need to demonstrate, for example, that their project aims to achieve an advance in science or technology, and is set up to research an issue where the scientific or technological feasibility is uncertain. It may be involved in researching or developing a new process, product or service, or improving an existing one.
To avoid a claim being challenged by HMRC, says Dave, it should be made clear how the criteria were met – and detail what was spent on the R&D project.
He adds: “Communication between the accountant and the client is key with a detailed understanding of the business, its products or services and how they are being developed and improved helping to identify potential claims.
“It’s important to understand that R&D is not confined to the world of laboratories and scientists in white coats: we’ve made claims for clients across a number of sectors, including engineering, software development and food & drink. These include the development of algorithms to enhance the performance of detection equipment, the use of sonar technology to enhance baking performance and work to build in additional safety features to equipment used in potentially hazardous environments following regulatory changes.
“Any company can make a claim, provided the work meets HMRC’s criteria. There is a separate, but still advantageous, scheme for larger corporates. We would encourage companies to bring in a specialist to review projects to see if they meet the criteria for R&D tax relief.
“We worked with an oil and gas company to ascertain if their research projects met the strict conditions of the R&D definition for tax relief purposes. Using our in-house expertise and approach, it was established that this was qualifying work. Claims to date have achieved tax savings in excess of £160,000.
“Expenditure on R&D projects including wages, pension contributions, national insurance, contractors, testing, materials and software can be included in claims. If a full-time member of staff spent one day a week on the R&D project, then that percentage of their total employment costs can be included in the claim.
“In addition, patent box – another government incentive – can go hand in hand with R&D tax credits. Patent box can allow companies to benefit from a reduced corporation tax rate of 10% instead of the normal rate of 19%. There are qualifying criteria to be met and a need for good record keeping to support the claim. Again, we can advise on how to do this.
“We’ve been assisting companies with successful R&D claims for 16 years. It goes back to understanding the client’s business and working with them to ensure the report that accompanies the tax return ticks all the boxes as far as HMRC is concerned.
Established in 1990, Meston Reid & Co can help companies on a fixed, flexible or contingency fee agreement. Dave adds: “We will be able to advise clients of all sizes on the best way to move forward.”