There has been a longstanding misconception that only hi-tech companies can apply for R&D tax credits. The latest statistics from HMRC, however, show that this perception might finally be changing with a 22% rise in claims in the past year by small and medium enterprises (SMEs).
Although this is a positive shift, research shows that many companies are still missing out on the valuable tax reliefs available.
HMRC stats show that the South West was slightly below the national average growth in claims, but still saw a 17% increase with over 2,000 R&D claims submitted in 2015/16. The total amount of R&D support for the region totalled £130 million, £5 million higher than the previous year.
There is a similar story for Patent Box claims. In the South West 100 Patent Box claims were submitted in 2014/15, up from 65 in the prior year.
The total amount of relief claimed rose to £43.5 million, over three times the relief claimed in the prior year. In the year to 30 April 2017, the Hazlewoods Innovation & Technology team identified qualifying expenditure of £28.5 million for our clients, generating R&D tax repayments of nearly £4.2 million. In addition, we completed Patent Box claims generating tax savings just shy of £1 million.
Any companies that are developing new ideas, products and processes could potentially benefit from an innovations tax claim. The tax reliefs available could help the company save considerable amounts of money, freeing up funds to further invest in development.
Claims are not restricted to those companies in the technology sector, we have prepared claims for companies across diverse sectors including; food and drink, health and beauty, automotive and aerospace.
The relief available depends on the size and profitability of the company. As an indication the effective cash value for R&D claims based on rates as of 1 January 2018 are:
- Small and medium sized companies:
Patent Box profits are taxed at a rate of 10% rather than the current Corporation Tax rate of 19%.
Some typical costs which can be included in a claim are:
- Staff and agency costs for time spent on R&D (including salary, employer’s NIC and pension contributions)
- Consumables including materials used and utility costs.
- Certain payments to sub-contractors
1. The work we do isn’t R&D.
Many companies we speak to think that because they are not a science or technology company they cannot be carrying out R&D activities. This is not the case and the definition for tax purposes is actually much broader. A company that is innovating, improving or developing a new product, process or service is likely to be carrying out R&D.
2. The development project was not successful so I won’t be able to claim.
This is not true. Actually, an aborted or failed project can help to demonstrate that the advance in technology was not easily achievable and can be a positive indicator that R&D is taking place.
3. We subcontracted the project to another company or another company subcontracted the project work to us. The rules around this are a bit more tricky, but an R&D tax claim is often still possible. To help ascertain this, it will be important to have a clear picture of who the work has been contracted to/from, the associated costs and the type of work.
4. I can’t make an R&D claim because we made a loss.
The relief for loss making companies is actually higher (up to 33.35% of development costs compared to 24.7% for profitable companies). Loss making companies can also claim a payable tax credit, so receive money back from the government!
5. It is not worthwhile filing a patent box claim since the rules have tightened.
The new rules only look to restrict a patent box claim where the R&D expenditure was incurred by a group company or if the IP was acquired. We can take a look to confirm eligibility and potential tax savings under the regime.
If you would like to discuss whether you might be able to file an R&D tax and/or patent box claim or if you would like further information on the tax incentives available please contact David Clift on 01242 237661 or David.Clift@Hazlewoods.co.uk