Research and Development tax credits for limited companies have been around for 17 years now, and in the tax year ending 2015, according to HMRC figures, the amount claimed reached a record high of £19.6 billion. This very generous tax relief can provide cash at crucial points in a company’s life, but is not given automatically.
What is Research and Development? A quick re-cap
The typically dry HMRC definition is that research and development “seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty – and not simply an advance in its own state of knowledge or capability.”
If that hasn’t made your eyes glaze over, or inspired you to run for the hills, perhaps I can provide a better summary. If you were to condense the HMRC definition into something more understandable, it essentially means work undertaken by a company which is (or tries to be) ground-breaking in the commercial field to which it applies. Note that expenditure on a failed research and development project can still be claimed, provided the project aimed to advance science or technology in its field.
This article concentrates on the small and medium sized business (SME) scheme. Currently the size thresholds to qualify for this relief are set by the EU, so they are subject to possible revision in the future. To qualify you must have less than 500 employees and either annual turnover under €100 million or a balance sheet total under €86 million. If your company is part of a larger group, the group as a whole must meet the criteria.
What’s the point?
If you are a start-up company, or are loss-making, R&D tax credits can be an invaluable source of extra cash. This is because broadly speaking, losses attributable to R&D claims can be surrendered for a cash refund. As ever, the actual calculation is more complicated than this, and there are certain nuances dependant on the company’s individual circumstance.
The cash refund is 14% of the surrenderable loss. Alternatively, you can carry forward the loss to reduce your future corporation tax bill which results in offset against 19% corporation tax.
Even if you are making profits, because R&D tax credit claims enhance qualifying expenditure to 230% of the amount actually spent, this can reduce your tax bill by 44p for every qualifying £1 spent, compared to 19p for every £1 tax deductible expenditure as standard.
Is it worth it?
Definitely!
For reference here are two examples of cases we have recently been involved with:
Company A – a Company operating in the field of medical research engaged us to review and advise on their research and development tax credit claim. During our review, we were able to identify an additional c£30k for the total R&D tax credit claim. We were able to maximise the Company’s claim by speaking to the right people, and reviewing the company’s records, giving us the knowledge to fully understand the business activities.
In total the Company made a claim for (received in cash) over £265k for the year. During the research stages maintaining cash flow is fundamental to the success of the company, so this was a great result.
Company B – a start-up software company looking to disrupt a particular niche market by building an entirely new operating platform. We were engaged to assist with reviewing eligibility and quantifying allowances, and over the five year period of our involvement successfully claimed qualifying expenditure in excess of £4.4m, which as the company was still largely pre-revenue, resulted in total refunds of almost £1m, providing vital cash during the development phase.
We have assisted clients with research and development claims of varying sizes across many industries, ranging from oil and gas, to manufacturing, to medical research and software development. As with everything, the first step is the most important, so if you suspect you may have a claim to make, or even if you would just like to find out more, please don’t hesitate to contact us, either via your usual Ryecroft Glenton contact or speaking directly to one of our specialist team members.
To read our Factsheet on Research and Development please click on the link: Research and Development