Furthermore with 20+ staff employed, and the complex and uncertain nature of the web-service integration projects they’re involved in, R&D credits are likely to be worth in excess of £50,000 annually to this small business.
The example above prompted us to put together a post outlining some of the commonly held misconceptions that we come across, which frequently prevent people giving tax credits the attention they deserve. The subject of R&D tax credits can be a complex one, often marred by bad advice and inaccuracies. This is intended as a broad guide, but if you believe you may qualify, a quick phone call is usually the best way to make sure, from start to finish the process typically takes 10-12 weeks before you receive payment from HMRC. Most of the examples cited relate to the creative industries, but can often equally be applied across other industry sectors.
“We just do R&D for our clients, we don’t do any R&D ourselves”
It’s fairly common for agencies to believe that research and development work they’ve been commissioned to carry out by by their clients is not eligible for tax relief. Many people believe their clients’ should be claiming for this R&D work, and they most likely also should be. If however, the subcontractor is undertaking an element of the risk by being contracted to do the work, then they could still be eligible for R&D credits. R&D credits are not limited to internal projects, they can also be client funded, and if you’re working on a fixed price contract, then you’re likely bearing some of the risk.
“We’re innovating, but this isn’t groundbreaking research”
If your project is looking to “achieve an advance in science or technology” it could still qualify under the scheme. For many people, it’s difficult to quantify what they do on a daily basis as advancing either science or technology. Advancement in web and software development is not so much about new features and functions. It is about the processes behind these features and functions. If there is technological uncertainty, it could potentially qualify.
For a web developer this could encompass; integrating disparate data systems in a new, or untested way, creating custom middleware, developing algorithms for onsite search, creating augmented reality experiences, complex CMS integration or bespoke apps for clients. If an agency is creating simple WordPress sites for clients, then this work would be unlikely to qualify, but if your web development work is somewhat more complex, then R&D credits should be fully explored.
“We’re not profitable yet, so we haven’t paid any corporation tax to claim back”
Regardless of your level of profitability to date, the fact you have yet to pay any corporation tax does not prevent you from claiming. Some of our largest claims have been for early stage companies, investing significantly in developing new platforms and technologies, but with little in the way of revenue. R&D tax credits can be transferred into cash, providing much needed cash flow for startup businesses, still investing heavily in developing their own IP. Loss making SMEs are actually able to receive more in R&D tax credits than companies that are profitable, a loss making SME can recoup 33% of R&D expenditure vs. 25% for a profitable SME. HMRC restrictions once limited R&D tax credit claim values to the level of a companies NIC and PAYE contributions, these restrictions were removed for accounting periods ending after 1 April 2012, but it’s still common for startup businesses to not investigate R&D tax credits in the mistaken belief that this restriction still applies.
“Everything we do is R&D”
It may be that all of the businesses primary business areas can be categorized as R&D. Claims are calculated based on eligible expenditure, which can include salaries (Including employers NIC and pension contributions), subcontractors and consumables. The scheme is designed to incentivise companies to carry out research and development activities, pure R&D businesses can expect to receive up to 33% of R&D expenditure (incurred since April 1 2014) back under the scheme, 25% of expenditure in the case of profitable SMEs.
“We haven’t done any R&D for a couple of years”
R&D expenditure can be reclaimed for your previous two completed accounting periods. So if your accounting period ends on 30 August, then you can currently claim for expenditure that took place between September 2011 and August 30 2013. After 30 August 2014, the opportunity to claim for expenditure in your accounting period ending August 2012 will be lost.
“<Helpful friend> advised us that we wouldn’t qualify”
If you’re involved in research and development activities there are things that can potentially prevent a company from qualifying under the scheme, but if you’re involved in development work, and haven’t explored the possibility claiming with an R&D tax specialist then it’s impossible to know for sure. It’s extremely common to find that companies have been wrongly advised that they won’t qualify, only to process numerous successful claims for the business on the receiving end of some bad advice. If you’ve been advised that you don’t qualify, it’s worth seeking a second opinion, it costs nothing but could add hundreds of thousands to your bottom line.
“We’ve been in receipt of grant funding, so we don’t qualify”
This is something that we come across frequently; especially where the company is involved in particularly ground breaking or innovative research. While it’s true that receiving government aid does limit the amount you’re able to claim under the scheme, provided you’re registered for corporation tax, you can still qualify.
R&D claims can appear daunting, and the HMRC guidance on software development makes for pretty heavy reading for almost anybody that’s not a qualified taxation professional. If you believe you may qualify it’s worth putting in a phone call to find out for sure, it could be one of the best calls you ever make.