Research and Development Tax Credits: The Facts

Research and Development tax credits have been growing in popularity over the past few years; stories of companies receiving tens (and hundreds) of thousands of pounds for work they did not realise was considered R&D by HMRC are more common. Despite the fantastic opportunity presented by R&D tax credits, particularly in the current economic climate, between the majority of eligible businesses are still not recovering their costs.

 

The R&D tax credit scheme has been ran by HMRC for over two decades, yet it remains commonly misunderstood by companies and many accountants. The presence of spurious R&D advisers, who have often experienced success in another business but do not know or understand the R&D tax credit guidance (a consequence of a low barrier to entry and an unregulated market), has worsened the problem.

 

Partially to blame for the dichotomy of understanding is the name itself; “R&D” conjures up images of test tubes, laboratories and microscopes. In reality, many businesses are conducting R&D without realising.

 

HMRC’s four main criteria cause further confusion:

  • The project must seek a sector wide advance in science and technology
  • There must be technical uncertainty associated with the project
  • The company must try to overcome these uncertainties
  • The solution must not be readily deducible to a competent professional

 

Whilst that may initially appear like a restrictive definition, the reality is quite the opposite; lots of companies are carrying out qualifying activities without knowing. Whilst most accountancy practices are aware of R&D tax credits, due to the extensive, highly specific guidance and experience required to apply it correctly, few are adequately equipped to assist their clients with the exercise internally; specialists are required.

 

So what type of activities actually qualify? Below are a few common examples, though the list is by no means exhaustive.

 

  • Process improvement; making internal processes faster, cheaper, more environmentally friendly, or more efficient using technology.
    • Example: Automating back office functions, like invoicing and admin, using software
    • Example: Enhancing the functionality of existing manufacturing equipment or integrating new equipment into a production line
  • Product/service enhancement; improving the capabilities of a product or service through technology.
    • Example: Using existing machinery to develop a product outside of its usual capabilities, or using machinery to achieve a purpose beyond that which it was intended for
  • New Product/Service Development; developing a product/service entirely from scratch
  • System development; integrating multiple standard technologies (hardware or software) in a manner which expands their capabilities
    • Example: Integrating a CRM system with accounting software and a website in a manner which exceeds their native functionality
  • Modification of existing products to change/improve their functionality
    • Example: Enhancing the functionality of a software platform or improving the features of a product (like durability, longevity or cost)

 

You do not have to do these activities internally; paying a subcontractor to do R&D on your behalf is categorically eligible. Due to the breadth of eligible activities, R&D is applicable to a range of sectors, from printing and textile companies to brewers and property development businesses (and everything in between).

 

Failing to understand the breadth of activities that qualify has caused many businesses to miss an enormous number of recoverable costs, or shy away from applying completely. Fortunately, by using a specialist with a proven track record and methodology that is recognised and respected by HMRC, you can recover costs retrospectively over the past two financial years. Reputable R&D specialists also present an opportunity for accountancy practices to expand their range of services and add value to their clients through synergistic partnerships. With an average recovery of £57,228 per financial year, it should be something all businesses explore to see if they could benefit.

If you have an accountant, they should be your first stop for business advice. If you don’t have an accountant or they can’t help, BuBul has a wide range of experts available. For more advice, contact our expert* Nat on LinkedIn.

*We’ve picked experts we know and trust who are good at what they do. All of them will give you at least an extra 30 minutes free advice if you contact them and would then charge their normal prices. They don’t pay to be on BuBul and don’t give us any money from anything they earn as an expert.