The costs our businesses spend on research and development are often taken for granted; and worse still, from an accounting perspective, rarely classified as R&D. After all, some expenditure can be seen as wasted when we follow certain paths that don’t lead to a successful outcome.
The Financial Act 2000, states that at least a proportion of these costs can be claimed back as a tax credit or repayment from HMRC. This, in effect, allows your business to lower its tax bill by claiming back these costs.
In addition, R&D costs identified can be accelerated. This is dependent on the year when the R&D took place. The range for this acceleration is between 200% and 225% of the total cost benefit. Your accounting team will then be able to offset any of the accelerated costs against profits. If your business does suffer a loss, you can receive a cash credit from the HMRC if you surrender the accelerated costs.
At the moment, many UK limited businesses don’t actually claim this benefit. In 2012, less than 1% of all limited companies were claiming this tax relief. The main reason for this is because so few businesses know they can or understand the basics.
Why Is The Government Allowing This?
The UK government introduced this scheme because it recognised that if the British economy is going to hold its place as one of the world’s elite, then innovation and growth are key. This was demonstrated by George Osborne, the Chancellor of the Exchequer (and will he still be there next week??), who in March 2014 stated that businesses not making a profit will still be able to make a claim.
It also encourages businesses to invest in projects that would not have been given the go ahead by executives because of their costs. Now because they act as a valuable tax break, they can be financially viable.
When Are Research And Development Tax Credits Available?
There are two main two requirements for your business to offset your R&D costs against profits. The first is when your business has a technical justification to enhance itself. Secondly, you must have taken a financial risk. The risk may have been minor and it can relate to a number of business areas including: financial, industry, buying power, staff competence/knowledge.
How Do You Make A Claim? Those 5 Steps:
There is a very strict process you need to follow when making claims for Research and Development Tax Credits. These can be split into 5steps that help you justify the expenditure and demonstrate that it fits within the definition of the scheme.
Step One: Due Diligence
For your business to claim the R&D activity in the first place you need to assess whether any of these costs have been claimed previously.
Step Two: Project Audit
An audit needs to take place that will identify the viability of uncertain projects and establish their progression, outcomes and goals.
Step Three: Project Analysis
The project or activity is broken down and then rewritten so it is in the preferred format that the HMRC uses to assess claims.
Step Four: Technical Justification
This is one the most important steps in the process. Your business needs to justify, through the definitions and legislation, why it qualifies for R&D tax relief. It would help if you ensure that your case is put forward in the HMRC’s preferred format. Hiring a professional to help you would be money very well spent.
Step Five: Financial Risk Analysis
You need to correctly identify the specific expenditure based on your R&D activity, and demonstrate there was a clear risk incurring that expenditure.
If your business is typical of the vast majority of UK businesses you are missing out on significant tax relief by not claiming back research and development costs.
And if your business is doing anything that could be classed as “research” in its broadest (and do think broad for this purpose) sense then why not contact Tectona for a free chat to advise you how best to structure things to maximise your R&D Tax Credit claim. Simply click here to contact us