Iain Rankin investigates why some companies fail to claim R&D tax credits and suggests that there has never been a better time to submit an R&D claim.
The UK government offers tax relief on research and development (R&D) projects to reward innovation by UK businesses. While data shows an accelerating upward trend in the number of claims, many potentially eligible firms fail to claim the tax credits they are entitled to.
Why are some companies still missing out?
Despite the potentially transformative nature of the relief to small and medium-sized enterprises (SMEs), there is a widespread concern by business owners about the applicability of claiming R&D tax relief. The three main assumptions that stop companies from claiming R&D tax credits are outlined below.
1. R&D only applies to large companies
In fact, the R&D tax credit scheme for SMEs - defined as companies with fewer than 500 staff and either not more than €100 million turnover or €86 million gross assets – is considerably more generous than the research and development expenditure credit (RDEC) available to large businesses.
2. R&D applies only to science and technology
The R&D criteria have been kept wide on purpose so that companies taking a risk by trying to resolve scientific or technological uncertainties qualify for the tax credit claim.
3. R&D relief only applies to profitable (tax paying) companies
On the contrary, companies of all sizes can benefit from R&D relief as a cash credit where they are loss making. R&D tax credits can either help to reduce a limited company’s corporation tax bill or be claimed as a cash sum reimbursement from HMRC if the company is loss making.
Why the time is right to make a claim
There has, in fact, never been a better time to apply for R&D tax relief.
HMRC has cleared its recent backlog of R&D claims, reducing average processing time from an R&D claim being submitted to the tax credit from HMRC being received, from four to five months to four to five weeks. Any business needing a quick funding injection can now view an R&D tax relief claim as a potential cashflow boost.
What does the future hold?
At the time of writing, there is an impending Budget in February 2020, which may herald new changes to business tax.
Whilst there is no way of knowing if the overall Budget outcome will make R&D tax credits more or less attractive, the new anti-abuse measures announced in last year’s Budget and consulted on in the spring will be revealed. These changes are set to reintroduce the PAYE cap on SME tax credits. The proposals would mean the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year. This will have a disproportionate effect on R&D claims from small and start-up companies with few employees.
Finally, Brexit is likely to have a significant impact on UK businesses. If forecasts are to be believed, foreign investment in the UK will fall. Uncertainty is likely to prevail for some time after an initial Brexit deal while the UK negotiates new relationships and trade deals with the rest of the world. Against a backdrop of a global economic slowdown, tax relief is more crucial than ever to boost profits, improve cashflow, and fuel further innovation and investment.
Practical tip
The above considerations should add an element of urgency for any company with a potential claim for R&D tax credits. The reality is that this relief is far more widely applicable than many believe, can be secured in a relatively timely manner, and continues to be hugely valuable to UK businesses who invest in innovation.
