Invest to Grow: Myth-busting R&D tax credits
RSM
This blog post is part of the Greater Birmingham Chambers of Commerce’s Invest to Grow campaign. Invest to Grow aims to inspire and inform businesses around investment in R&D, innovation, technology and machinery and how it can help boost productivity through case studies, expert opinion pieces and briefing information. Click here to find out more and don’t forget to join the conversation on social media with #I2G18. Part 1 of Invest to Grow focuses on investment in innovation and research & development and is sponsored by the University of Birmingham.
Having been around since the year 2000, with over 140,000 claims having been made and more than £14bn claimed in tax relief, it could be assumed that businesses were aware of R&D tax credits and the relief that may be available to them. However, 18 years later some common misconceptions still exist that result in missed opportunities and under-claimed relief. There are six common R&D myths:
- R&D tax relief is only available for companies that employ people in white coats – Many assume that only scientific laboratories or research & technology companies are eligible for R&D tax relief. However, any company involved in technological or scientific problem solving can make a claim.
Manufacturing businesses represent the highest number of claims in the UK, but claims are also regularly made by transport and storage businesses, construction and real estate as well as financial services and agriculture to name a few.
- My company hasn’t invented anything, so we can’t claim – HMRC has clear rules on the type of activity that qualifies for R&D tax relief. While they cover ground-breaking products and processes, companies don’t necessarily have to invent something radical to make a claim.
The fundamental purpose of R&D is to create a competitive advantage. If your company’s R&D puts you ahead of your competition and creates a scientific or technological advance in your sector then it will qualify. More often than not, relief if claimed by companies which spend money on improving or modifying existing products or internal processes.
- We can’t claim as our customers have funded our R&D – Some companies carry out R&D work following a request from their customers. Others may act as a subcontractor and deliver R&D work for another company. However, both activities can still qualify for R&D tax relief.
- We don’t pay corporation tax so we can’t make a claim – Many businesses believe that they can’t make an R&D claim as they don’t pay corporation tax. However, where a company is loss making and not paying corporation tax there is good news. If a company chooses, they can surrender the corporation tax loss created through R&D activities for a cash tax credit from HMRC. Under the most generous R&D regime this can result in a repayment of 33p for every £1 spent that qualifies for R&D treatment.
- HMRC will start investigations into all of our tax affairs if we make an R&D claim – HMRC do review R&D claims before processing tax returns and has specialist units purely dealing in R&D tax relief claims. These specialist units have a pragmatic approach to assessing claims and there is usually no need to worry.
The submission of an R&D claim does not mean that HMRC will automatically investigate other areas in the return. Claims are usually submitted with supporting documentation which sets out the qualifying R&D activities undertaken, the basis for the claim and how it is calculated. Reports like this help to reduce the chances of a challenge from HMRC.
- We think we are doing the same as our competitors, so we can’t claim – At the core of any R&D claim is the advancement in the overall knowledge or capability in a field of science or technology. It is not sufficient just to advance a company’s own knowledge. However, if a competitor has made an advance in science or technology but details remain a trade secret, then a company’s own development can still qualify. Companies can also qualify for R&D tax relief where there is an improvement in a product, process, service or material. So, building on a competitor’s earlier development may qualify.
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Amy Burton
Associate director
RSM