n.b These statistics refer to the report released in 2014. For information for 2015, read The ForrestBrown Guide To HMRC Tax Statistics 
In fact there were 13,010 claims from SMEs in 2012-13, representing a 30% increase on the year before. And what about their value?
Well, that was up too – from £430 million in 2011-12 to £600 million in 2012-13. £100 million more was paid out in corporation tax reductions than the year earlier, and the value of payable tax credit payments increased to £280 million from £220 million in 2011-12. Big money is available to companies that claim.
What is behind this surge?
Put simply, research and development tax credits have consistently been becoming more straightforward to claim, and more generous for some time now. The increase in headline rates available under the scheme have done a lot to drive this growth, awareness is growing and companies in the know are keen to leverage any advantage available. There have been a series of enhancements to the scheme which have considerably widened the pool of companies that are eligible to claim relief, prior to April 2012 a companies claim value was limited to the value of their NIC and PAYE contributions within that accounting period, which hampered many smaller businesses efforts to claim. The lifting of the restriction has meant that thousands more early stage companies have been able to take advantage of the relief. Minimum spend restrictions were also lifted within this period, meaning that a small business investing a relatively modest £4,000 in qualifying R&D activity could look to receive a £1,000 repayment from HMRC.
But who are these companies, what counts as R&D and what do you need to do to join them?
Who claims R&D tax credits and who doesn’t?
There is a well-established myth that R&D is limited to companies in sectors such as pharmaceuticals, engineering and manufacturing. While more claims are received from SME manufacturing companies than any other sector, the SME information and communications industry benefits more financially, receiving over £180 million during the period covered vs the £165 million received by manufacturing businesses. This sector categorisation does need to be treated with some caution, as the stated sector does not necessarily reflect the sector in which the R&D was carried out. For example 25 claims were processed for SME real estate businesses, but the R&D activity being recovered could equally have been for developing new back-office systems, developing a new property platform, creating a new geo-location app or costly algorithm development to achieve more accurate search results for customers.
Almost every sector is represented in the statistics but they do contain some surprises, and highlight some sectors where R&D tax credits are still being under utilised. Accommodation and food account for only 25 SME claims, and given the volume of innovation in the UK food industry this does seem surprising. Qualifying R&D activity could include, for example, creating gluten or wheat free alternatives, altering the formulation of a recipe to extend shelf life, creating a new packaging design which enables more product to be transported via container shipment or the head chef of a Michelin restaurant perfecting a new recipe combination. Defence businesses are another which are poorly demonstrated in the R&D statistics, with no SME defence businesses being represented whatsoever. An issue that arose during government consultations over the introduction of the Above The Line (ATL) R&D tax credit, was that many in the defence sector feared that the MoD would look to claw back the ATL credits in the pricing of its non-competitive R&D contracts with industry, and questioned the impact on pricing models, ultimately the MoDs procurement guidelines were altered to ensure contract prices remain unaffected by the introduction of the ATL credit. Under the Large company scheme defence companies are amongst the largest beneficiaries of relief.
What counts as R&D?
Speaking abstractly you need to be:
- Improving a product, service or process or creating something new, and
- Taking on risk in doing so – i.e. there should be an element of uncertainty in achieving the outcome
The criteria for precisely what can qualify for relief is kept purposely broad, provided it can be argued that the work being done represents an advance in either science or technology then it can potentially qualify. There are a few exceptions to this, in that social sciences, arts and humanities (including economics) are not included within this classification of science, however companies participating in these disciplines can still claim, but in these instances the advance being sought must relate to a technological advance as opposed to a scientific one. For example a FinTech company which was wholly involved in producing complex economic projections for their clients would not be able to claim relief for advances achieved in the field of economics, but the underlying work they had done to develop bespoke software and complex algorithms to analyse large datasets in order to create their projections, would almost certainly qualify for tax relief.
These criteria can be applied to just about any business in any sector.
An ingredients manufacturer looking to develop new emulsifiers and stabilisers could for example recover: staff costs, ingredients, subcontracted specialists, utilities and potentially some costs associated with product testing via R&D tax credits.
A retailer developing a new click and collect smartphone app could equally qualify for relief, but there’s also a strong likelihood that the marketing agency working on the project and the app developers themselves could look to secure relief.
Companies that recognise their innovation could see a boost to cash flow or a significant reduction in corporation tax liability.
How do you claim R&D tax credits? Three steps to success
The first bit you need to do yourself. That is recognise that you may be innovating.
Paradoxically this could be the easiest and most difficult step. Easy because all it requires is a change in mindset. Difficult because if you have never done it before where do you start? Why take the risk?
However, there should be no risk in exploring R&D tax credits. There are plenty of services that won’t charge anything for some initial consultation and many wont charge until a claim has been won. In other words: a success fee.
Once you have the mindset the next step is to speak to a tax expert.
Accountants can help, but as R&D tax credits are a highly specialist area it is usually worth talking to a specialist who can maximise the monetary value of the claim to you – working alongside your accountant and advisers where required.
A specialist will examine every relevant area of your business, compile an R&D narrative for submission to HMRC and then manage the claim to completion.
Speak to an expert today
ForrestBrown wholly specialise in helping companies to claim R&D Tax credits. We’ve successfully delivered millions of pounds worth of benefit to our clients. The biggest mistake that most people make is to not seek specialist advice, if people rely on interpreting the guidance published by HMRC themselves then it’s very unlikely that an untrained eye will be able to identify all of their expenditure which can potentially be recovered. This point is illustrated well by one of our clients, David Bone of Ocean Resource who specialise in offshore, subsea and ocean engineering who’d looked into the possibility of claiming prior to contacting us. David recently commented on working with us:
“Simon looked at the very extensive Research and Development that Ocean Resource undertakes and put a completely new perspective on how we looked at this expenditure. The result of his close review and innovative approach was that we were able to maximise our R&D tax reclaim to levels we had not previously dreamt of. Specifically where we anticipated getting a tax rebate of £36 we were actually able to reclaim more than £15,000 through Simon’s superb efforts and skilled approach. This has greatly aided the development of the company and increased our confidence in our on-going R&D programme and expenditure. This is great for our company and good for the UK.
Sometimes when something looks too good to be true it actually is true. Thank you ForrestBrown!”
Call us today on 0117 926 9022 for a friendly chat to explore how you can benefit from R&D tax credits just like the other 35,000 companies that have benefited since the scheme was created.