O R&D TAX CREDITS Busting common myths and opening doors
Contents The importance of R&D for your business 03 What s happening in the world of R&D? 04 The common R&D myths busted 08 The R&D practical checklist 11
R&D myth busting The importance of R&D for your business Research and development (R&D) tax relief and credits are a key part of the government s strategy to encourage investment in innovation in the UK. Despite the continuous need for innovation and bespoke solutions, there are two common assumptions made by companies; they do not undertake any qualifying R&D activities and it is too difficult to make a successful claim. Many companies take a near constant approach to R&D, so much so that they do not recognise their own innovation and therefore, do not make the appropriate claims. How much could this mistake be costing companies? Making a claim can be much easier than you think. Companies in practically all sectors undertake some qualifying R&D activities. They just need to recognise it. R&D claims could entitle companies to significant tax relief, and present businesses with an opportunity to reduce the amount of corporate tax payable to HM Revenue & Customs (HMRC), in some cases resulting in a significant cash repayment. Qualifying R&D expenditure therefore can be worth big money. Companies should make the most of this generous tax relief now, seriously challenge their own pre-conceptions and question their eligibility to make a claim. The extra benefit could really make a difference to a company s bottom line. We have found that there are common myths that often stop companies making a claim and we have pulled these together to bust these misconceptions. O
04 What s happening in the world of R&D? Since the introduction of R&D tax reliefs in 2000, over 141,000 claims have been submitted to HMRC by the UK s innovative companies, representing almost 14bn claimed in tax relief. Qualifying R&D expenditure; average SME claim across all sectors. RSM National average 406k 105k 106k Cash benefit 27k Cash benefit
R&D myth busting Regional analysis of R&D claims 5% 2014-2015 (Latest publicly available data released by HMRC*) 10% NORTH WEST SCOTLAND NORTH EAST 3% First time applicants: the number of SME claims almost doubled since 2011-2012 confirming our belief that many businesses are still not claiming at all or are under-estimating their qualifying expenditure. It is clear from the analysis on the left, that companies in certain regions are not taking advantage of the R&D tax relief. NORTHERN IRELAND 3% 8% WALES 3% 7% WEST MIDLANDS LONDON YORKSHIRE AND THE HUMBER EAST MIDLANDS 6% 10% EAST OF ENGLAND Missed opportunities are generally twofold; a failure to realise that the company qualifies for relief or an assumption that it is too complex to make a claim. R&D tax relief has been around for almost 18 years and many businesses may have already made up their minds that their activities do not qualify for it. However, there is huge potential for a more focused uptake by companies across all regions in the UK. Drilling into the numbers, there are some stark disparities which we feel indicate that there is still widespread misunderstanding of what can be claimed. The national average claim for a SME in the manufacturing sector is about 25 per cent less than we have achieved for our clients in the sector. 19% SOUTHEAST 8% SOUTH WEST 18% * All national stats in sections three and four taken from this report.
06 In terms of sector analysis, some industries are making huge strides with others still lagging behind. We ve taken a closer look at the number of R&D tax relief/credit claims made and compared national statistics with RSM UK s. Manufacturing Information and communication 31% 45% RSMUK % of claims 25% 35% RSMUK % of claims Manufacturing continues to represent the highest number of claims made in the UK. Many manufacturing companies underestimate the extent of their R&D activity, possibly because they focus on products and do not consider the improvements to their manufacturing processes. Many companies also take their development activity for granted and do not recognise their own innovation. It is not surprising that information and communication represents a large proportion of R&D claims in the UK given the rapid pace of technological development. However, as a constantly evolving sector it is only a fraction behind manufacturing. The constant change and state of development of products and platforms could be making it challenging for companies to determine whether they can make a successful claim. But businesses could be surprised at the list of potentially qualifying activities in this sector. Transport and storage Construction and real estate 1% 1% RSMUK % of claims 3% 2% RSMUK % of claims Only 140 claims for R&D tax relief were made by companies in the transport and storage sector in 2014-15 in the UK. This is very surprising as R&D will be occurring in a significant number of disciplines in this sector, such as alternative use of strong, lightweight and durable materials, self-driving cars, aerodynamics, power generation and storage and process improvement. With more emphasis on working green and gaining efficiency through innovation, construction projects involve more R&D than ever. Given the increase in the use of building information modelling technology and the trend towards seeking alternative environmentally friendly solutions, we expect to see a continued rise in both claim rates and values for the foreseeable future. However, far too often we find that many companies working in this sector still do not recognise the R&D opportunities they have. These include research completed to submit in tenders, building and infrastructure design, ground work innovations and alternative environmentally friendly products.
R&D myth busting National averages for additional sectors Financial and insurance Professional, scientific and technical 1% 20% Electricity, gas, steam, air conditioning, sewerage and waste Admin and support services 1% 5% Agriculture, forestry, fishing Other sectors (mainly education, health and retail) 1% 12% So what are the common factors that are stopping companies from exploring this generous tax relief?
08 The common R&D myths busted 1. R&D tax relief is only for companies that employ people in white coats Many assume that only scientific laboratories or research and technology companies are eligible for R&D tax relief. However, any company involved in technological or scientific problem solving can make a claim, including those operating in manufacturing, engineering, software development and even construction. HMRC figures show manufacturing businesses made the most R&D tax relief claims in 2014-15, followed by information communication companies and those in the professional, scientific and technical sector. More than 100 R&D relief requests were also submitted from organisations in construction, health and social work, arts, entertainment and recreation, agriculture, forestry and fishing, finance and insurance and transport and storage. Recently, a successful claim was made by a company in the construction sector which developed three product families that made advances in the corrosion science field. Its claim resulted in additional tax losses that led to a 95k future benefit to the company. O 2. 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 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 is claimed by companies which spend money on improving or modifying existing products or internal or external processes. Across the automotive sector, for example, a significant amount is spent each year to design and develop more fuel efficient cars. A leading car manufacturer recently made a successful claim for extending its existing model range to include a car that has lower emissions and is faster and lighter than the previous model. It led to an HMRC repayment in excess of c. 750k.
R&D myth busting 3. 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. There are two options available: SME R&D relief and the Research and Development Expenditure Credit Relief (RDEC). If a company does not meet the SME criteria, it may still be able to claim under the RDEC rules, although the relief may not be as generous. However, some form of additional relief is better than none. It can be difficult to determine what qualifies as subcontracted work, so each case must be determined on the individual facts. However, the main indicators typically fall in to three areas: the degree of autonomy of the subcontracted company; the ownership of intellectual property; and, the economic risk in the arrangement. 4. 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 and even a choice on how the R&D benefit is used. The R&D claim can either be carried forward as trade losses to be deducted against trading profits. This will help save tax in the future. Alternatively the loss generated by a claim can be surrendered to HMRC for a cash repayment known as a tax credit. 33% cash benefit for loss makers For every 1 spent that qualifies for the SME R&D tax credit, a company receives a payable credit of 33p. For large businesses, the RDEC tax credit is 11 per cent. Meaning for every 1 spent, a 9p tax credit is received. A recent example is where a design and manufacturer of electrical equipment made a claim. The company made a loss of over 1m and claimed for a qualifying spend of over 750k. They received a cash tax credit of over 250k. The relief claimed can be significant. A company that was subcontracted by a retailer to develop in-store payment software made a successful SME claim that reduced its corporate tax liability by 400k.
10 5. HMRC will start investigations into all our tax affairs if we make an R&D claim HMRC should always review R&D claims before processing tax returns and has specialist units purely dealing in R&D tax relief claims. These specialist units apply 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. This gives peace of mind that a claim is robust. company which submitted its own claim which then resulted in an enquiry. This was due to poor calculations and not applying the rules correctly. Since the enquiry it has requested that RSM is involved in the R&D tax calculations and prepares a report for HMRC to review. The company has not had another enquiry since. Companies often run into trouble when R&D claims have been prepared by themselves. We ve worked with one 6. 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 development can still qualify for R&D. For example, a waste converting facility had several competitors developing similar technology. Each were at varying stages in the development process but the advancements were not know by other. The company made a claim and received 2m payment from HMRC. Similarly, the application of new science and technology which has been proven in one field may still qualify if being applied in a new field of science or technology where this has not yet been proven. 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.
R&D myth busting The R&D practical checklist If you think you might have an R&D claim then ask yourself these questions: Question Yes/No Advice Are you investing resource in developing or enhancing your product/ service/ process? Have you spent time enhancing a process, or making it more efficient (eg reducing lead times/ wastage etc)? Does the project go beyond iterative updates to an existing process, product, material or device following established methodologies? Does the project advance your own company s state of knowledge, in a way that couldn t have been achieved by using publicly available reference or research materials? Did the project involve specific scientific or technological challenges that gave you initial concerns as to how the outcome may be achieved? Was there complexity in how an overall system might react or operate, as opposed to individual components? Did the project require you to devise novel solutions that were not readily available prior to your work beginning? Do the results of the project establish a new level of expertise in a particular field? Did the project involve setbacks, or temporary technical failures? This is a key indicator of qualifying R&D activities being carried out, and suggests that a claim is worthy of further consideration. You shouldn t ignore processes here even if the end product remains the same. The advance can be in how the product could be constructed more efficiently faster, lighter, cheaper. To qualify, you need to demonstrate an appreciable improvement that was achieved or attempted by adopting a novel or untried approach. Don t overlook company specific advances even if the advance isn t world leading, provided you couldn t find the answer, and had to go through your own R&D process, it can be qualifying R&D for you. As assessed by the competent professional (HMRC terminology, but essentially the member of your team with technical responsibility for the project), did the aim of the project challenge existing knowledge, resulting in a process of iterative design and development being implemented? Despite using a number of off the shelf products, there can still be R&D in how you use these to develop a system or product which, together, represents an advance in science or technology. This would suggest a level of technological uncertainty as assessed by the competent professional, one of the two cornerstones required to qualify for R&D tax relief This would demonstrate the advance as being significant. the other of the two cornerstones required to demonstrate qualifying R&D activity. This would demonstrate the technological uncertainty for R&D (if not for the Finance Director), failures are great! R&D rewards cost, and risk in innovation. A failure can sometimes prove insurmountable technical complexity in trying to achieve a solution. If you ve answered yes to one or more of these questions it is likely your business has a potential opportunity to claim. If you would like help and advice on the best way to proceed please get in touch with our national R&D Team.
Contacts Birmingham Amy Burton Associate Director, Tax amy.burton@rsmuk.com T: +44 (0)121 214 3207 Bury St Edmunds Melanie Reed Partner, Tax melanie.reed@rsmuk.com T: +44 (0)1284 772975 Leeds Richard Wilson Director, Tax richard.wilson@rsmuk.com T: +44 (0)113 285 5000 Leicester and Milton Keynes Sheetal Sanghvi Associate Director, Tax sheetal.sanghvi@rsmuk.com T: +44 (0)116 282 0664 London Andrew Nash Tax Director andrew.nash@rsmuk.com T: +44 (0)20 3201 8253 Manchester Colin Smyth Partner, Tax colin.smyth@rsmuk.com T: +44 (0)161 830 4105 Nottingham Kevin Edwards Partner, Tax kevin.edwards@rsmuk.com T: +44 (0)115 964 4484 Scotland Elizabeth Leonard Associate Director, Tax elizabeth.leonard@rsmuk.com T: +44 (0)131 659 8300 Southampton James Tetley Partner, Tax james.tetley@rsmuk.com T: +44 (0)23 8064 6464 rsmuk.com The UK group of companies and LLPs trading as RSM is a member of the RSM network. RSM is the trading name used by the members of the RSM network. Each member of the RSM network is an independent accounting and consulting firm each of which practises in its own right. The RSM network is not itself a separate legal entity of any description in any jurisdiction. The RSM network is administered by RSM International Limited, a company registered in England and Wales (company number 4040598) whose registered office is at 50 Cannon Street, London EC4N 6JJ. The brand and trademark RSM and other intellectual property rights used by members of the network are owned by RSM International Association, an association governed by article 60 et seq of the Civil Code of Switzerland whose seat is in Zug. RSM Corporate Finance LLP, RSM Restructuring Advisory LLP, RSM Risk Assurance Services LLP, RSM Tax and Advisory Services LLP, RSM UK Audit LLP, RSM UK Consulting LLP, RSM Employer Services Limited, RSM Northern Ireland (UK) Limited and RSM UK Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. RSM Legal LLP is authorised and regulated by the Solicitors Regulation Authority, reference number 626317, to undertake reserved and non-reserved legal activities. It is not authorised under the Financial Services and Markets Act 2000 but is able in certain circumstances to offer a limited range of investment services because it is authorised and regulated by the Solicitors Regulation Authority and may provide investment services if they are an incidental part of the professional services that it has been engaged to provide. Baker Tilly Creditor Services LLP is authorised and regulated by the Financial Conduct Authority for credit-related regulated activities. RSM & Co (UK) Limited is authorised and regulated by the Financial Conduct Authority to conduct a range of investment business activities. Whilst every effort has been made to ensure accuracy, information contained in this communication may not be comprehensive and recipients should not act upon it without seeking professional advice. 2017 RSM UK Group LLP, all rights reserved.