The regime for providing tax incentives for companies carrying out research and development (R&D) has been part of the UK tax legislation since 2000, but many companies who are undertaking R&D are missing out on the R&D tax relief, often because they don’t know what counts as R&D.
New Government statistics have revealed that less than five percent of SMEs that are potentially eligible to claim R&D Tax Credits have made a claim – indeed, the team at Luvo continue to come across many organisations and companies carrying out genuine R&D activity that have not considered claiming R&D tax relief, often due to a lack of appreciation of what actually qualifies.
Here Luvo’s Ian Batkin and Vicki White look at the reasons for this misunderstanding and explain what actually does count as R&D.
In our experience it is usually due to one of three reasons why companies don’t consider they qualify for R&D Tax relief:
- they aren’t aware of the rules (and don’t think what they do qualifies);
- they have been incorrectly advised by their advisers (or not advised at all about this); or,
- they may simply think that the process will be too complicated and onerous/time consuming.
So what counts as R&D?
Bottom line is that R&D activity must involve the resolution of uncertainties that leads to an advance in science and/or technology.
The company must be able to demonstrate that the technical problems they encounter are resolved with original innovative solutions that advance science and technology generally, rather than just advancing the knowledge of the staff members in the company.
An engineer may come up against a problem that he is unable to resolve by talking to appropriately qualified colleagues or by reference to technical resources – the internet or others.
In this case, developing a solution is likely to be R&D, even if the work is ultimately unsuccessful. Care is needed with regard to the development of prototypes and HMRC’s simple guide in this area can help to further explain: http://www.hmrc.gov.uk/gds/cird/attachments/rdsimpleguide.pdf
What does HMRC need to know?
When HMRC reviews R&D claims, they will want to:
- understand the nature of the advance that was sought,
- what problems the company faced and how they overcame them,
- why the information to address the problem was not readily available to a competent professional working in the field.
Product and process development can count as R&D
The R&D reliefs are not limited to those companies which are creating the latest wonder product. The rules will apply to companies that may be going about their business developing products and processes and dealing with and resolving technical problems as they go.
R&D activity may be undertaken by companies where R&D may not be the first thing that comes to mind when considering the company’s activities. Companies should therefore give some thought to their activities so that they identify any areas where R& D might be a feature.
If any areas or activities are identified, do they fall within the parameters detailed above?
To help decide, it is often helpful to look at specific examples of the type of R&D activity that could be eligible for R&D tax relief, so some specific examples of R&D that would be eligible for R&D tax relief are: –
- Manufacturers– in many cases manufacturing companies will face technical problems when producing products for customers. Some of these problems may be resolved in a routine manner, others may require more in-depth work which will fall to be treated as R&D. There are many well-known companies creating cutting edge products where R&D is an obvious element of the work they undertake;
- Metal fabricators– creating a large free-standing metal structure in a hostile environment where temperature variation is a material problem. R&D needed to resolve this issue to ensure that the structure does not fail. R&D may also extend to the fabrication process needed to achieve this;
- Insurance company– developing a new website which provides a customer engagement platform not seen or developed before;
- Architect practices– with individual projects designed for clients there will be many construction methods never attempted before – difficult locations/environments, new materials, new techniques. There will be technical uncertainties which will need to be resolved to complete the designs and delivery of the projects;
- IT companies– there are many examples of IT companies creating bespoke programmes for their own use or for their clients. In many such cases the programme will be unique and will have required detailed examination of algorithms, artificial intelligence and new computer languages to create the finished software package.
What is not classed as R&D activity?
Some companies mistakenly believe that because they describe an activity as R&D then they will be able to access the tax reliefs – it can often come as quite a shock when HMRC reject the claims because the activity does not meet HMRC’s stringent tests.
It is important to appreciate that just because something may be new for the company does not necessarily mean it is R&D – the creation of a new website is not R&D per se, the purchase and installation of a new piece of machinery in a production line is not necessarily R&D, the resolution of problems by searching the internet is not R&D but a simple advancement in the company’s own knowledge.
Care is needed because a false claim for R&D tax relief may be more problematic than no claim at all. It does genuinely help to talk to an expert in R&D tax relief to discuss the types of R&D activities your company is undertaking, and for them to work on a claim that addresses the key points and in turn, maximises the chances of a successful R&D claim.
Luvo mostly works for small and medium sized businesses in a wide variety of industry and market sectors, and also delivers specialist R&D Tax advice and claims support to numerous independent accountancy firms and practices. Luvo work on a contingent basis and nothing is charged for any initial discussions or support until an engagement is fully agreed. The firm’s team has achieved a 100% success record in making R&D Tax claims for its clients.