In the year 2000, the Government introduced Research and Development (R&D) tax credits. Since then the programme has gained popularity as the number of claimants have increased year over year. The primary reason for its popularity is that more companies realise additional cash and tax benefits have been left on the table.
The programme is specifically designed for high-growth small and medium-sized enterprises in addition to those companies that are in losses investing heavily into developing products and services. R&D tax credits have been brought in to encourage greater R&D spending, which results in greater investments in innovation. These credits work by reducing a company’s tax bill by an amount equal to a percentage of its allowable R&D expenditure. A company can claim R&D tax credits only if it is subject to Corporation Tax.
The results of the programme have been positive as the latest statistics showcase approximately 48,000 companies throughout the UK are claiming for these tax credits. However, there are several companies that do not take advantage of this programme due to one of the following reasons:
- Procrastination: Companies may have inquired about claiming but they do not necessarily take action in filing a claim;
- Concerns about HMRC: Companies express concern about HMRC raising enquiries and deciding to review their documentation;
- Limited resources: Companies, whether profitable or in losses, that have heavy workloads are primarily concerned with meeting their revenue targets and not having sufficient personnel to look into claims for R&D tax relief;
- Concerns about Eligibility: Many companies believe that their day-to-day activities are not considered eligible for the programme.
Let us explore the last item in further detail, which I would like to divide into three taxpayer groups.
There are many taxpayers who still do not know the programme exists. Therefore, for those taxpayers who do not know of the programme’s existence, no claims will result from them.
The second group are taxpayers who know of it, but believe it is a “fly by night” scam, whereby getting cash back and/or tax benefits from the tax man is unheard of.
Do I Qualify for R&D Tax Relief?
If you are a taxpayer in either of these two groups and are executive decision makers in industries such as software, apps, manufacturing, construction, engineering, chemical, architecture, injection molding, metallurgy and telecommunications, I encourage you to go to your computer search engines and type “R&D tax credits” so that you may get to know about the programme’s existence.
Now that is not to say that the programme will become clear by reading the various data you come across and whether you are eligible for claims. If anything, taxpayers of both groups will be left with more questions instead of answers.
As with most specialised tax incentive programmes, the Government has worded the R&D Tax Credit eligibility criteria in such a way that confuses many taxpayers, thus leading them to think of it as too complicated to claim, regarding themselves as ineligible.
This brings me to my third and final group of taxpayers. They are those who know about the programme and have looked into claiming, but have chosen not to do so. Those in this group are eligible to claim, but one of the following has most likely happened:
- They’ve been told about their eligibility by a so-called R&D tax credit consultant. They are inundated with a list of tax credit rules that they do not know much about and which ones they qualify for;
- A so-called R&D tax credit consultant asks them if their company has undertaken a technological advancement or uncertainty and what they believe to be their R&D activity;
- The advisors that have provided these services do not understand the taxpayer’s business and lack the technical capability to identify what is eligible, therefore, creating lack of trust
No Fears Allowed
Often many in this group of taxpayers that have opted not to claim are simply asked the wrong questions with advice that is limited to verbatim rules of the programme; or they lack an understanding of a taxpayer’s respective industry. This results in getting insufficient and poor advice with equally poor performance in their claims, increasing the chances of being subject to HMRC penalties shifting their efforts to solely meeting company targets.
Now that I have underlined the various challenges for taxpayers deciding not to claim, let’s get into the solutions.
To convince all three groups of taxpayers, I simply would simply request that your company consider what we at RDP Associates call the “6 P’s of Eligibility”
- Does your company develop new or improved Products?
- Does your company develop new or improved Processes?
- Does your company develop Prototypes?
- Does your company employ technical Professionals (engineers, software and app developers)?
- Does your company file, or has been issued Patents?
- Does your company encounter design or development Problems?
If you can answer ‘yes” to one or more of the above 6Ps, it is likely that your company is eligible to claim for R&D tax credits. Do not judge yourself about being ineligible.
RDP has been advising companies and performing R&D claims worldwide for over 30 years. RDP can assess your company’s R&D tax credit eligibility in addition to advising on a range of cash savings within a 20-minue phone call assessment.
A.K. Hajee is RDP’s Director of Technical Services and Business Development for the UK market. He has two decades of experience in preparing and educating businesses about R&D tax credits.