Running an innovative business? Why you deserve some credit
This article discusses how tech businesses can claim tax relief on their day to day work and save thousands
Being at the cutting edge of innovation is an all-consuming process. For business owners dreaming of delivering the next piece of disruptive technology, life revolves around winning over investors, product launches and sales growth.
It doesn’t matter whether you’re running a start-up or an established firm, the last thing you want to do is spend precious time filling in forms or getting bogged down in bureaucracy. Yet there is a business case to be made for paying attention to the details. One key area of admin that innovative UK tech companies should never skimp on is applying for research and development tax relief.
To help raise awareness among tech businesses of the value of R&D tax credits, FS & Tech Partnership has teamed up with R&D tax relief experts, Apogee Associates. Collectively, we can now take the bureaucracy from you and help you to access tax relief and claim what you’re owed.
In this blog we call on Apogee’s knowledge and look at the benefits and challenges of making an R&D claim, as well as some of the trends in this area.
Eligibility: what are R&D tax credits for and why should you claim?
Launched by HM Revenue and Customs in 2000 to help stimulate innovation in the British economy, R&D tax credits are split across two schemes (although they may consolidate in the future). The schemes are the SME tax credit incentive and the Research and Development Expenditure Credit (RDEC), which is generally utilised by larger companies.
Get it right and the outcome can be a huge reduction in your corporation tax bill or a big cash injection into your business. For example, an SME company that spends £100,000 on research and development could see a cash benefit as high as £26,970[1]. However, many firms struggle with the complexity of the criteria and give up because of uncertainty around whether their activity qualifies for relief.
It’s not hard to see why. To succeed in securing R&D tax benefits, firms need to be: seeking an advance in science or technology; encountering scientific or technological uncertainty during the project; taking action to overcome this uncertainty; and attempting to achieve things that could not be readily deduced by a competent professional in the relevant field.
Whilst ticking these boxes is a crucial step, presenting this to HMRC, in a way that clearly highlights the eligibility of the project, is a completely separate skillset.
It’s this impenetrable phrase ‘scientific or technological uncertainty’ that seems to cause the most confusion. In a nutshell this means that when companies are conducting research and development projects, technical challenges not readily deductible by a competent professional in the field have to be addressed.
Apogee’s Director, Jack Morgan, says that any company that is “improving the current state of technology and science in a specific field, through the development of new products or processes, or the improvement of existing ones,” might be fulfilling HM Revenue and Customs’ definition of research and development for tax purposes.
He adds: “If you’re adapting technology to make a process faster or more efficient there is a good chance that you will be eligible to recover the associated costs through the R&D incentive.”
“Additionally, attempting to make an existing product in a more cost efficient or environmentally friendly manner, or developing an entirely new product, process or service that seeks to be fundamentally ‘better’ than existing solutions are also contenders for relief.”
The areas eligible for inclusion in a claim include staff costs for employees involved in research and development, third-party costs such as subcontractors undertaking development on your behalf, any software such as CAD programmes, and associated consumable items (materials for prototypes, for example).
Growing in popularity: why are more businesses applying now?
An increasing number of companies are applying for tax relief support because it can pay metaphorical dividends. According to UK Government statistics for the tax year 2021-22, a total of 90,135 businesses provisionally claimed tax relief – five per cent more than 2020-21.
Collectively this amounted to £7.6 bn – an increase of 11% on the previous year and which corresponds to £44.1 bn of R&D expenditure. The Government says the figures relate to SME and large company schemes combined.
Interestingly, the average value of claims also increased by six per cent during 2021 and 2022. This, says HM Revenue and Customs, is driven by an average increase of nine per cent in the SME scheme.
However, it might be the result of a bounce back in research, which had been prevented during the pandemic. Of the sectors making the lion’s share of claims, Information & Communication, Manufacturing, and Professional, Scientific & Technical sectors accounted for 62% of total claims and 67% of the total amount claimed for the tax year 2021 -2022.
Where should I start?
The process of applying for R&D tax credits can seem onerous and tempting to delay if you only have a small team which already has enough on its plate.
If that’s the case, it might make sense to seek professional advice, as significant savings can be made, massively outweighing any fees. Getting it done by an expert also provides the reassurance that your claim is much more likely to be error-free. Expert support makes it more likely that all costs are being recovered. Some are very nuanced and can be difficult to calculate.
You can also optimise operations and accounting to ensure you get the most out of future claims. For example, if you have a lot of employees travelling for R&D, the travel is eligible if the employee pays for it themselves and the company reimburses it but it is not eligible if the company pays for it directly. Small tips and tricks like this have the potential to massively increase claims in the future.
In addition to the financial benefits, there’s also a time-saving potential. And that has got to be better than getting bogged down in form filling while you’re trying to deliver your next game-changing innovation.
How we can help
We are working with Apogee to support our clients with a discounted rate. If you want to know more, please email Chris Hopwood at chris@tech-agency.co.uk.
Sources:
Research and Development Tax Credits Statistics: September 2023
[1] This rate of recovery will be applied to expenditure incurred after 1 April 2023.