The R&D tax relief can offer companies significant reductions in their tax bills.
A glance back at 2009
With recession making headlines for the better part of 2009, many business leaders in the UK are among those left wondering what 2010 may hold for their companies, their employees and many other key stakeholders. Indeed, 2009 was not a prosperous year for many businesses around the world, especially small and medium-sized (“SME”) enterprises. The credit crunch, housing market collapses and increasing unemployment statistics seemed to create an almost perfect economic storm – the largest since the Great Depression in the 1930’s. Unprecedented governmental bail-outs of large financial institutions only further revealed layers of economic decay.
Signs of Recovery
However, less than two years since the start of the current recession, there already seems to be signs that patches of the UK economy are starting to recover from the downturn. These include an increase in production output in some manufacturing sectors, a stabilised housing market, the repayment of some of the taxpayers’ money by the failing banks and a resilient retail sector.
It is still to be seen whether a wider economic recovery is on the way. However, it is clear that many factors have contributed to the emergence of the so called “green shoots”. Two are worth mentioning in detail.
Firstly, many companies have adopted an approach that helps them become more operationally efficient during the economic turbulence and focused on their core businesses. Through adaptation, evolution and innovation, companies manage to either improve sales by enhancing their existing product or service portfolio to meet customers’ changing demands or control their cost base through more streamlined operational processes.
Secondly, governments around the globe are intervening to support their respective economies, with financial stimulus packages amounting to hundreds of billions of pounds in many cases. In addition to the large banks, support has been made available to help the wider business community, especially SMEs. These measures include: interest rate cuts, bringing forward investment in public projects, initiatives designed to helping SMEs obtain finance such as the enterprise finance guarantee scheme and numerous enhanced fiscal incentives.
From a tax perspective, the Research and Development (“R&D”) tax relief for companies investing in business innovation is one of the more opportune measures.
The link between these two factors is that where companies invest in innovation to remain competitive, the UK government rewards them through the R&D tax relief schemes.
How the R&D tax relief may help your company
The R&D tax relief can offer companies significant reductions in their tax bills. There are currently two types of scheme in operation - the SME and the large company schemes.
Subject to qualifying conditions, companies may claim up to 175% of their annual qualifying spend in their tax returns to be set against their corporation tax bills. Where companies are loss making, this may lead to an additional tax loss to be relieved, typically carried forward to reduce their future tax liabilities. For SMEs, the enhanced tax losses can alternatively be traded in for a cash refund, up to £24.5 per £100 spent, from HM Revenue and Customs (“HMRC”), the UK tax authority. Potentially, this can deliver a significant cash source for many.
R&D demystified
The concept of R&D may seem to be daunting for many companies as it may often be linked to the image of researchers in white coats working in laboratories. However, to qualify for the tax relief, companies can be operating in any industry or business sector.
The key to a successful claim is that companies need to demonstrate, that they have carried out projects in a qualifying period that seek to achieve an advancement in a field of science or technology. The relevant R&D project need not be ground breaking or warrant a Nobel prize. Rather, it should represent a non-trivial challenge that cannot be readily resolved by a competent professional within the relevant field.
Such an initiative may translate into situations where companies add new functions or features to an existing flagship product. These functions or features may enhance consumer experience, improve an existing operational process to achieve significant cost savings or duplicate the effect of an existing service in a much improved way through the deployment of technology.
Companies also need to keep supporting documentation to back up their claims, including how they have tried to address the challenge concerned in a systematic manner.
Recent changes
Since its introduction in 2000, the R&D tax relief has been subsequently rolled out to large companies and amended by the government on a number of occasions to extend the level of support available to companies involved in R&D activities.
Recent changes include an increase of the relief percentage for both the SME and the large company schemes and the expansion of qualifying company thresholds so that more companies fall into the more generous SME scheme.
In his pre-budget report last month, the Chancellor of the Exchequer announced that some of the more onerous qualifying conditions are to be removed for qualifying SMEs, especially the ownership of intellectual property (“IP”) generated from the R&D projects. The actual implementation and writing into law of this proposal has yet to occur. Once passed the royal consent, the next Finance Bill incorporating such provisions will take effect on corporate R&D expenditures incurred in the accounting periods ending on or after 9 December 2009.
HMRC has also set up Specialist Units around the UK to help SMEs with their claims. Large companies may submit their claims through their normal large business service offices. One of the key objectives of HMRC is to promote the schemes so that more companies are able to claim.
The key for many companies to ensure the success of their claims is to ensure that claims are presented in a suitable structure and language that facilitate HMRC’s review and approval. For many companies, the R&D tax relief may prove to be a significant opportunity to help with their post-recession growth.
We at Leyton have over 10 years’ operational experience in dealing with R&D claims for companies on a no-win, no fee basis. We would be delighted to discuss how we can help you maximise your R&D expenditure.
Call us now to discuss how the R&D tax relief can benefit your business
207 043 2300