UK R&D Tax Credits: Use Research and Development to Fuel Company Growth
R&D (Research and Development) is a little-known, yet incredibly powerful component to any business looking to innovate. Not only does it lead to competitive advantage, but a fair amount of money invested in this department can be claimed back through government tax credit.
We asked Mike Baker, who heads Business Development at EmpowerRD, to shed light on how businesses can leverage R&D tax credits to innovate at reduced cost. EmpowerRD, an industry-leading R&D tax credit specialist in the UK, has helped companies claim back over 20 million pounds worth of funding.
Watch the full event replay here, or read on to find out how R&D tax credits can help your business grow faster!
Understanding R&D tax credits
The R&D tax credit scheme was introduced in the UK at the beginning of the 21st century, as a way to foster innovation. Since then, the scheme has evolved year after year to accommodate businesses’ needs.
As Mike puts it, “the idea behind it is to help companies invest in R&D by helping them receive back a portion of their costs every single year. There are about 83,000 companies and counting currently claiming in the UK, with an average claim value overall of £57,000.”
Claims can come in several forms:
If a company is loss making, the claim would come back as a cash credit;
Firms which are profitable and spending money can receive a benefit as corporate tax relief;
If a company is sitting in the middle - they have profits, but the actual spend on R&D is greater than the total profit - the claim would come back as a mix between the two.
Claims can then offset one’s company's taxation, while also giving businesses access to a portion of cash.
Although they’re a very efficient lever, claims shouldn’t be the only way for companies to accelerate their growth pattern. As Mike points out, “we always recommend taking a blended approach to funding. Whilst EmpowerRD only focuses on tax credits, we also work with a number of partners. Other things you can use to help accelerate your business growth are grants, debt financing, and crowdfunding. But the important thing to note”, he says, “is that the R&D tax claim can be done every single year.”
Which businesses are eligible for tax credits?
Claims are handled by HMRC (Her Majesty’s Revenue & Customs). As Mike explains, there’s neither a minimum nor a maximum amount which can theoretically be claimed, but there are criteria to figure out if businesses are eligible.
The most important criterion, he says, is to ask yourself if there is “a high degree of uncertainty in what you're trying to achieve. For example, if you’re working on something new, is there a set way of doing it already, which is known for the market? Or are you trying to do something fundamentally new, which can't easily be replicated and does demonstrate creating a scientific or technological advance?
“As long as you can show that you’re creating something fundamentally new, then you should be eligible.”
Mike also clarifies: “what it boils down to is: are you creating a new product or service? Do you improve on a process that is already out there?”
How to submit your R&D claim
In order to submit a claim, businesses need to gather two fundamental pieces of information.
The first one is cost collection, which consists of assembling all the costs directly related to R&D. And many different costs can be included in the claim.
HMRC's definition includes all costs which can be directly related to R&D, and which are used up in the process:
The first and largest one is usually staff costs and salaries, which is directly proportional to people's time spent on R&D;
Businesses can also claim for any subcontracted costs (which are capped at 65%);
Besides, they can submit a claim for any sort of consumables. These might be raw materials or software costs.
But beware of commercial activities like marketing and sales. As Mike says, “these are an absolute no-go and will raise large red flags with HMRC.”
The other piece of information needed to submit a claim is called the technical narrative. Mike explains: “this is the part describing to HMRC what the different projects are, what the different uncertainties are, and what challenges you face.
“This way, you can explain why the costs are eligible in the first place. In a nutshell, the technical narrative is a description of what the company's been doing, why it's eligible and ultimately how much you’re looking to claim for.”
When and how to submit a R&D tax claim
Businesses can claim every single year, once their year-end accounts are finalized. It’s also possible to claim back for the previous two financial periods.
There are three main ways to submit:
Businesses can submit their claim themselves. This option is generally recommend for small companies that invest less than £70,000 a year in R&D;
They can rely on their accountants;
They also can hire professional advisors.
Once submitted, HMRC will review the claim to ensure it fits the official guidelines for what eligible R&D costs are. This process typically takes about 28 days.
One last piece of important information businesses should keep in mind is that there are two different types of schemes, based on the company’s size.
As Mike specifies, “the first is the SME Scheme, which is the most generous. The SME Scheme lets you claim back in the form of corporate tax relief or cash credits. This can go up to a third of your costs. Now, if your company is too large (above 500 employees or more than 86 million pounds in gross assets) you need to apply to what is called the RDEC Scheme (Research and Development Expenditure Credit).
This scheme is less advantageous as you can only claim up to 13% of your total qualifying costs. However, the government is being more generous year after year, this percentage is likely to increase as it did in the past.”
Mike’s tips to get the most out of your claim
Although you can only claim when your year end accounts have been finalized, this doesn't mean you should wait until then to actually look at R&D tax. As the amount you can receive back is up to a third of your R&D, this is a significant potential amount, which Mike recommends you track throughout the course of a year.
As he advises, “tracking claims all year long can help you better budget for your future claims. It also means when the year end comes around, the process to build your claim is smoother and more streamlined. The most important thing to work on ahead of time is the technical narrative. This is where about 70% of inquiries happen.
“If you’re waiting until year end to work on it, you're then asking your tech teams to remember projects they worked on 10, 11 months ago. So, we'd always recommend companies to keep track, plus copies of their invoices.”
Mike also highlights that another interesting (and underrated thing) about R&D tax credits is advanced funding. As he explains, “this isn't something which is often spoken about, but is hugely beneficial. What I’m referring to is the benefit to lend against a company's R&D expenditure. The reason behind this is that it helps companies fast track projects and product launches. It’s a beneficial way for your company to raise some non-diluted funds.”
Best practices to find the right R&D advisor
Claiming R&D tax credits can be a complex process. And sometimes, it can be much more efficient to work with professionals. Mike shares a final bit of advice on how to select and team up with a good advisor.
Ensure the company charges acceptable market rates. “When I initially entered the market, the average rate for helping a company to claim was about 15 to 20%. This has since gone down to an average of about 10%.”
Get opinions from existing customers. “Are they working with actual tax professionals or accountants? A lot of accountants are R&D specialists, but you do get the occasional ones who don't have any specialization and yet will still try to charge a premium for their service.”
Do your due diligence. “It’s common sense, but when you're looking for an advisor, you’re trusting them with a large amount of money. So, make sure you’re looking through Trustpilot reviews. You should also expect transparency about their key success metrics.”
Check if inquiry support is included. “We very much believe it should be. If a company is helping create the claim for you, they should be backing up their work. They need to be able to answer any questions to HMRC, should they occur.”
Don’t forget that the report is a self-assessment. “You need to be able to see a copy of what the company's going to be submitting, just so you’re able to give that final tick off.”
Don’t lock yourself in multi-year contracts. “The market's always changing, so make sure you're not locked in!”