Making tax credits work

Since research and development (R&D) tax credits were introduced in 2000 for small and medium-sized companies, and from 2002 for large companies, the number of claims and their values have soared. From 2000/01 to 2016/17, over 240,000 claims were made and £21.4bn  in tax relief was claimed.

Small companies are some of the biggest claimants, too. The number of SME claims rose by 23% to 36,820 in 2015/16, according to HM Revenue & Customs. So far, for 2016/17, there have been 39,960 claims, of which 34,060 are in the SME scheme.

On the surface the statistics are positive and it’s in the government’s interests to help SMEs claim R&D tax relief if ministers want to hit their target (included in the Industrial Strategy) to raise investment on R&D to 2.4% of GDP by 2027.

However, the UK’s gross domestic expenditure on R&D represented just 1.67% of GDP in 2016. If we consider that in the UK there are 5.7m SMEs, but only 34,060 claims received in the SME scheme (and some companies submit more than one claim a year), there appears to be a large number of small companies missing out.

Many of them do not necessarily lend themselves to R&D that would be eligible for relief, but research by tax credit specialists Catax backs up the understanding that SMEs are still missing out.

Catax’s study revealed that more than 1.6m SMEs failed to claim their entitlement to as much as £74bn R&D tax relief. An emphatic 78% of small businesses polled said they had developed new products or business processes in the past two years, but 55% hadn’t claimed R&D tax relief.

“The challenge is that at the top end, SME education is slightly better. They have access to advisers – which may have their own R&D tax credits teams. Or they can bring in experts. But the smaller SMEs with a handful of employees are poorly advised,” says Mark Tighe, CEO of Catax.

Key reasons put forward for perceived ambivalence among some sectors of SMEs towards claiming R&D tax relief are both the administrative complexity and a lack of understanding. The rules around R&D tax relief are complicated, and the eligibility criteria is ambiguous. Expert advice and experience is critical for SMEs looking to investigate whether they are eligible for a claim or not.

“Most eligible companies are now applying, but new companies are formed all the time; some fail and others stop doing R&D. There is, however, a two-year window to apply following the completion of an R&D project, giving companies and advisers a greater chance in terms of claiming R&D tax credits,” says Rufus Meakin, MD at R&D tax specialists MSC R&D.

Based on the figures, it is worth undergoing the process. The average R&D tax relief claim for SMEs in the first year is £49,000, according to Catax, which submits up to 200 claims a month and also sits on HMRC’s R&D Consultative Committee.

It is in everyone’s interests to make tax credits work, especially as uncertainty over Britain reigns for the near future. Innovative companies will be vital to future economic success, and they’ll need every bit of relief they can get their hands on.

AVOID MISSING OUT

1  HMRC says 37% of all SMEs are undertaking some form of R&D. Seek professional expert advice because there is a high chance some of your clients are eligible.

2  Directors can count their salary against R&D costs, which helps future investment.

3  Pensions contributions are also an R&D cost.

4  Be methodical in submitting claims. HMRC has tightened the claims process to prevent abuse because it has received poorly-compiled and inflated claims.

PREVENTING ABUSE

HMRC recently tweaked the process to prevent fraud. It had identified and prevented £300m of fraud linked to the relief. The amount that a loss-making company can receive is now capped at three times its total Pay As You Earn and National Insurance contributions liability.

Michelle Perry is a freelance journalist.