OK, so here’s a question for you all. What have UK microbreweries testing new flavours of IPA, restaurants experimenting with innovative dishes, financial advice firms creating bespoke CRM systems to improve the client experience, and local taxi firms developing proprietary online booking systems to compete with Uber, got in common?
Answer: they’re all – almost certainly – eligible for Research & Development tax relief. We know this as all four of the examples given above are everyday businesses that we’ve already secured this valuable tax relief for. And when I say valuable I mean valuable: on average, eligible UK companies can get back around 25 per cent of their ‘qualifying’ investment.
‘Qualifying R&D expenditure’, to clarify, can include the cost of staff used to carry out the R&D work, any supporting software, travel costs, utility bills such as power and water, certain payments to subcontractors, and any fees incurred in creating a prototype. It’s no surprise, then, that the average tax benefit we’ve delivered to companies is £39,000.
Unfortunately, very few corporate tax reliefs are as misunderstood, and as underused, by UK start-ups and SMEs as Research & Development. This is a big problem, as in the 2014/2015 tax year, for example, ‘everyday’ UK SMEs were responsible for more than four in five UK claims.
But sadly just one per cent of eligible SMEs, according to HMRC, actually make R&D claims. The vast, vast majority are unaware that they can, or are simply unaware of R&D full stop — and so never bother. A survey we carried out of 500 owners of UK SMEs in the Spring drove home the extent of the disconnect. It was eye-opening to say the least.
Our survey revealed that more than half (51 per cent) of SME business owners have never even heard of R&D tax relief. But with 57 per cent of respondents saying they ‘have developed a new product or service, and/or implemented a new business process over the past two years’ — which is the basic requirement for an R&D tax claim — most SMEs would potentially be eligible for R&D tax relief.
And even for those UK SMEs that had heard of R&D, over four in ten (44 per cent) thought it is restricted to specialist tech, drug and science companies employing ‘people in white coats’. In reality, R&D can be claimed by companies of all sizes from all sectors. The myth that it’s only available to giant pharma companies needs to be debunked.
Oh, and there’s another common misunderstanding, too: 43 per cent of UK SMEs also mistakenly believe that any eligible R&D activity has to be successful and integrated into a business for a claim to be made. This is not true: the outcome of the R&D is irrelevant – what matters is the time and money spent.
Ask yourself this
So with all the confusion out there, how can SMEs find out if any activity they’re carrying out is potentially eligible for R&D tax relief? For starters, note that R&D tax benefits only apply to those businesses that are liable for corporation tax. They’re not applicable to sole traders, for example.
So if your business does pay corporation tax, next up my advice is for you to ask yourself the three simple questions below:
Are you developing a new product or service within your sector?
Are you improving an existing product or service within your sector?
Are you doing anything in your business that could help you gain a competitive advantage in a new and innovative way?
If the answer to any of the questions above is a yes, or even a maybe, then it’s worth seeking professional advice, whether from your accountant or a specialist operating in this area of tax.
The irony is, the government actually wants more businesses to put in for R&D relief. After all, R&D tax credits are essentially the government’s way of rewarding innovative companies for activities that should, further down the line, increase the UK’s wealth creation capacity — and as a result boost the government’s tax revenues.
In that sense, everyone’s a winner.
Mark Tighe, CEO, R&D tax relief specialists, Catax
Further reading on R&D
Nominations are now open for the British Small Business Awards, the leading event celebrating the brightest stars in the SME sector. Click here to enter, and make sure you get involved today using the hashtag #BSBAwards. Good luck!