Small business are losing out not claiming for R&D Tax Credits, says Luvo Financial partner Ian Batkin
The government introduced the R&D Tax Credit scheme almost 19 years ago, but with recent government statistics showing that just 5 per cent of eligible businesses are actually claiming them, there would seem a huge lack of awareness and understanding amongst SMEs as to what qualifies as research and development.
Given that the average R&D Tax Credit claim is between £50,000 and £60,000, innovative businesses are missing out on financial recognition of their pioneering work, as well as a cash injection for the business.
Misunderstanding among small and medium size businesses about the R&D Tax Credit scheme; what activities qualify for financial support; and importantly, whether their own product or service is likely to be eligible, continues to be widespread.
The majority of SMEs believe that R&D Tax Credit is only available to “lab coat and goggles” businesses, which simply isn’t the case.
Here are my top tips for R&D Tax Credits:
- Don’t assume that you aren’t eligible to claim ~ all types and sizes of companies, in a range of sectors have successfully claimed R&D Tax Credits over the past 18 years, and it’s certainly not just companies who have scientists working in laboratories who are eligible
- Know the type of projects that have and will qualify for and can be claimed under R&D Tax Credits — you are probably able to claim for more than you think, and even R&D projects which have ended will qualify. It’s almost as bad not to claim as much as you are entitled to, as not to claim at all.
- Ensure you claim for all eligible costs — there are seven categories of P&L costs that can be claimed for, some of which can be claimed for at 100 per cent of the cost incurred. For example, you can claim for a specialist R&D Project team, including for example your R&D manager or CAD engineer. It is also possible to claim up to 65 per cent of the costs of sub-contractors and externally provided workers or consultants who have been involved in your R&D work or project, so always remember to include these.
- Don’t claim for costs that aren’t eligible – it’s an absolute “no-no” if you try to include costs that aren’t eligible, so take care to only include costs which would qualify.
- Be aware of how far back you can go — under the so-called “two-year rule” you can only amend corporation tax returns and in turn retrospectively claim R&D Tax Credits, within two years of an Accounting Period End (APE) or “year-end”.
- HMRC typically settle claims in no more than four to six weeks ~ so the sooner you file the claim, the sooner you receive the tax back from HMRC, which will make the payment directly into your bank account. There’s even a mechanism that allows loss-making companies to claim back tax via Payable Cash Credits.
- Engage an independent R&D Tax Specialist ~ to support you in assessing eligibility and maximising claims, there is real benefit in working with a firm which specialises in R&D Tax and has a track record of successful claims for clients. Such firms will properly understand the legislation and HMRC requirements from R&D Tax Credits claims so will add value and maximise the success of your claim.
R&D Tax Credits are a valuable government tax incentive for limited companies who invest time and money into developing new products, processes and services, or significantly enhancing existing ones.