Making gains: are you missing out on claiming for R&D tax credits?

Research and Development (R&D) tax credits may not immediately spring to mind for consumer businesses but following recent press coverage highlighting some successful claims, now is the time to to pause and consider whether they are relevant. 

Recent Government statistics highlight that approximately £3 billion of support for R&D has been provided to companies across a wider range of innovative businesses in the past 12 months, and the Government continues to believe that more companies could be eligible. The support provided to businesses operating in the wholesale and retail trade and arts, entertainment and recreation sectors has increased from £110m to £190m in this period.

So how is R&D relevant for my business?

Firstly you need to establish whether your company is undertaking a qualifying activity that seeks to resolve a ‘scientific or technological uncertainty’ (problem) with a view to creating an advance in knowledge from a market perspective.

For example is your business:

  • Investing resource in developing new or significantly improved products or processes? 
  • Doing anything different to keep ahead of the competition from a technological or scientific perspective?
  • Have you addressed a technological problem, that gave you initial concerns, as to how the outcome may be achieved?
  • Have you devised a novel solution that was not readily available before you commenced the work?
  • Have you undertaken any significant work to develop IT systems or platforms that are used in the business?

Once you start to look more closely at your business you may start to identify some activities that may be relevant R&D.

You don’t have to be developing something completely brand new to be eligible for R&D credits. For example, if you are aware that a competitor is trying to develop a similar product or process but the details remain a trade secret, your company’s development can still qualify for R&D.

We’ve seen businesses take advantage of R&D by developing:

  • novel software to digitalise promotional vouchers used in retail outlets;
  • new gluten and dairy free products for a bakery business;
  • novel milk product with a flavour profile that has not been achieved previously;
  • new methods for preserving nutrients in fruits and vegetables;
  • new methods for cultivating root vegetables to enhance shelf life, reduce waste and enhance taste qualities;
  • new skincare products using culturally and ethically acceptable products; or
  • improved processes for whisky production by a distillery.

Companies of all sizes can claim R&D tax credits, although this may differ from sector to sector. For example claims that relate to development of food properties typically tend to be restricted to those made by larger food manufacturing companies, and these typically have an R&D function (although this is not always the case). However R&D credits may also be available for smaller businesses in the food industry where they can demonstrate the solution has potential for broader application in the market place.

If you’re undertaking eligible R&D your business could be entitled to significant tax relief on the relevant costs that can lead to opportunities to reduce your corporation tax bills.

Typical qualifying expenditure includes the costs of in-house staff or third party contractors directly contributing to the R&D project together with certain costs of materials and other overheads consumed in the R&D process. 

Depending on the size of the business, the tax relief on relevant expenditure may be worth between 9-44 pence for every £1 spent. For example a profitable company that spends £250,000 on qualifying R&D under the regime for small or medium sized businesses can reduce its tax bill by over £109,000 (FY17/18). In contrast, a profitable large company incurring the same level of expenditure can reduce its tax bill by approx. £70,000. Loss making companies can also claim R&D credits but at reduced rates.

The claim for R&D credits is normally made in a company tax return and is relatively straightforward. Furthermore, HMRC are generally helpful in dealing with claims and in some instances companies can obtain cash refunds within 6-8 weeks.

Companies should make the most of this generous tax relief, seriously challenge their own pre-conceptions and question their eligibility for R&D tax credits. It could be worth a lot of money and make a difference to the company’s bottom line.

RSM have assisted with the completion of R&D tax credit claims for many companies, so if this is relevant to you, we would be happy to help.