R&D tax relief applies to more than you might think
Tax Reliefs (including R&D)
Most people wrongly assume that they need to be in the scientific or technology sectors to be able to qualify for R&D tax credits. But they are available for a variety of situations in just about any sector - even developing new processes and information systems. These are valuable reliefs that can sometimes generate hundreds of thousands of pounds.
Martin Thomas, describes some surprising situations where Research & Development tax reliefs can be claimed by businesses. He also highlights some key areas to consider – including the use of contractors – to ensure you gain maximum benefit.
R&D applies to a number of sectors
Those in the construction sector usually face challenges during developments. Finding solutions to problems is something they face on just about every project on a daily basis. Many of these situations – where you have to explore novel solutions, or conclude that it can’t be done – qualify for the relief.
One of the qualifying criteria for R&D reliefs is uncertainty. Where the available knowledge and research doesn’t provide the answers.
There are a host of scenarios where our architecture and construction clients have made successful R&D claims. Where they are exploring the use of energy efficient materials, how to build drainage systems in unusual ground conditions or even learning how to create climate-controlled micro-environments with sustainable materials and different soil. Another example was where there was uncertainty about the suitability of a flooring system in a severely constrained site in a public building.
Even if the customer is paying for the development work, you may still be able to make a claim for R&D tax relief on your R&D expenditure, however because it is considered “subsidised R&D expenditure” it will only qualify for the less generous RDEC scheme. This area of the law is especially complex and nuanced so seeking professional advice is important.
For example, when a company is undertaking its own R&D and is receiving money for a project which they are delivering, the expenditure is deemed subsidised R&D but may still qualify under the RDEC scheme. This is where it can become complicated and seeking advice is important.
Examples of R&D across a number of sectors include:
- Engineering - There are many engineering companies that don’t realise they can make claims. It is taken for granted that they will work to design, assess and develop new tooling or manufacturing processes to meet customer contract requirements. Much of this development work – if it meets the necessary criteria – could qualify for R&D tax relief.
- Food manufacturing - Many food and drinks businesses may be experimenting with new packaging solutions – to reduce waste or use more environmentally-friendly materials. These areas are ripe for R&D claims.
- Property – There are few situations here that fit nicely into an R&D claim, for example, new functionality in a CRM system or developing automation for checking sites and integrating systems. There are also potential claims on specific property developments.
Other surprising claims
Another surprising claim was for a cleaning business that invested in the development of systems integration technology to support their IT management of contracts. In another situation, a company that developed a device to dispose of waste in an environmentally friendly way received the relief.
More down-to-earth claims involved a financial services company developing its own Enterprise Resource Planning (ERP) system. There was also a pension advice business creating an App platform for its customers.
Take care with contractors
To qualify for the maximum relief you need to take care with the balance of staff on your payroll and those who are external contractors. You have to navigate and balance the related rules on IR35 and the associated national insurance and other costs and obligations incurred with employment.
HMRC responded to an increase in incorrect and improper claims with the introduction of new rules in November 2020. These came into force on 1 April 2021. There is now a cap of £20,000 plus 300% of their total PAYE and NIC liability for the period. Although there is an exemption from the new cap if the company’s employees are carrying out the R&D themselves and subcontractor costs are less than 15% of the total qualifying R&D expenditure.
Different reliefs depending on the size of your business
The R&D relief is available to small and medium sized businesses. Those with less than 500 staff and a turnover below 100 million Euros (about £86 million).
Larger business can also claim the reliefs under the R&D Expenditure Credit (RDEC) scheme. And the amount qualifying for relief has climbed from 11%, to 12% and up to 13% from April 2020.
But there is a time limit on claims. You must submit claims within two years of the year end during which the costs were incurred.
We have clients who are generating £200,000 to £300,000 pa from these reliefs on a regular basis. These are vital for the continued success and profitability of those businesses. For businesses who suffered losses during the pandemic – they might even receive a tax refund.
How can Haines Watts help?
We have successfully advised hundreds of businesses on claiming R&D tax credits across a number of sectors.
If you would like to have an exploratory conversation to see if your project meets the criteria for an R&D claim, get in touch.