Research and Development can be a costly process but, with the right professional advice, businesses can get back much of the cost, as we discover talking to consultants Catax.
Innovation and business development are thriving in the UK, but they usually require significant investment from businesses which can be difficult to source, especially for start-ups and SMEs.
Any help from the taxman therefore is extremely useful. One of the most commonly known forms of tax relief is Research & Development (R&D tax credits). This is awarded to businesses that invest in innovation, usually in the form of developing new systems, processes, products, materials, devices, or any changes to the way a business works.
Surprisingly, despite being available in the UK since 2000, it’s still largely under-claimed.
The latest statistics, released from HMRC in September 2018, show that, despite the abundance of innovation being carried out by businesses, only around 43,000 R&D claims were made in 2015-16. To put it in context, this is only around 0.8% of the total number of businesses in the UK.
The UK government is looking to increase R&D expenditure as a percentage of GDP over the next decade from 1.7% in 2016 to 2.4% in 2027, so there’s huge focus on ensuring companies are continuing to invest, and are given the appropriate reliefs for developing new innovations within their sectors.
Catax is an industry leading tax consultancy which specialises in this form of tax relief and has been helping businesses claim back R&D since 2014. It employs more than 100 members of staff across the UK and guarantees to maximise the claim that is made on a client’s behalf. It reports that the average claim it sees for R&D is more than £56,000 – a sum that would make a significant difference to most companies’ annual accounts.
Chief executive Mark Tighe says: “One of the most common reasons for not claiming is lack of awareness. Many businesses are unaware that they’re eligible for R&D tax relief. HMRC was careful to define R&D in such a way it could apply to varied work across multiple industries, the idea was to turbocharge innovation across every sector.
“With this in mind, accountants have a key role in educating business clients about the potential gains of R&D tax relief and, where necessary, encouraging them to seek out the advice of an experienced tax relief consultant who can accurately advise on what work may qualify.
“Many other businesses just don’t realise they’re doing R&D. This can be partially due to the fact they just see it as their day job, even if they’re constantly innovating or they think R&D is for pharmaceutical companies in laboratories curing disease. In fact, many R&D claims are in sectors such as engineering, manufacturing, IT, food & drink and energy etcetera. Furthermore, R&D can be a process or system, not necessarily an end-product. Another common reason that businesses don’t claim is because they think claiming money from HMRC could result in an enquiry.’’
In fact, he points out, HMRC encourage this relief as it brings and keeps innovation in the UK, and encourages capital spend and employment. Successful R&D should result in further employment, add to a company’s bottom line and increase taxable profits in the future.
Another lesser known relief is the Patent Box. This form of tax relief, which was phased in from 2013, offers a reduced rate of corporation tax of just 10% on profits made from patents. This represents a near halving of the rate of corporation tax payable on IP related income, so it can make a significant difference to a business’s balance sheet.
“You would think that with a potential tax saving of this amount, companies would be champing at the bit to find out more and claim,’’ says Tighe. “But this has not been the case to date. The latest HMRC statistics on the number of Patent Box claimants will be published in October, however, the statistics which have been published to date indicate low numbers especially when compared with the number of R&D tax relief claimant companies.’’
He explains that the reasons for this are varied and are well rehearsed. They include the fact that the calculations are complicated, the benefits were unhelpfully phased in between 2013 and 2017 rather than being immediately available in full, and the requirement to elect in. Also, as with R&D, many companies aren’t aware that the relief exists at all.
“If your company has registered patents, it would be worth checking how much income they bring in, something that Catax would be able to help advise on,’’ adds Tighe. “The Patent Box can apply to sales related to, or stemming from, the patents in a multitude of ways, so a good understanding of the rules is needed to ensure nothing is missed.
“If a company makes sure it’s claiming R&D tax credit for initial work to develop innovative products and services, then protects and capitalises on the resulting IP through licenses, sales and the Patent Box tax relief, it should see a major boost to its income which can be reinvested to fuel further innovation and growth.
“If you’d like to find out more about claiming back either of these reliefs, speak to Catax today.’’
Catax can be contacted on 0300 303 1903 or firstname.lastname@example.org