Research and Development Tax Credit Relief: A Guide for Businesses
- Omar Aswat
- Aug 13, 2024
- 9 min read
Updated: Jan 5
In today's fast-paced, innovation-driven economy, businesses need every advantage to stay ahead. One of the most underutilised tools available to UK businesses is the Research and Development (R&D) Tax Credit Relief.
This incentive, designed to stimulate investment in innovation, can provide substantial tax and cash flow benefits. I know many companies, especially start-ups, rely on this type of funding access.
Many businesses are still missing out on these opportunities due to a lack of awareness or understanding of the schemes.
This article explores R&D tax relief, its benefits, and how to successfully claim this valuable support for your business.
[Just keep in mind that only limited companies (i.e. incorporated) can make a claim for R&D and therefore, if you believe you are undertaking R&D as a sole trader or in a partnership for example, please speak to us to explore further.]
Table of Contents
Understanding R&D Tax Credit Relief
The UK government introduced R&D tax credit schemes back in 2000 to encourage companies to invest in innovation.
Ultimately, governments use such reliefs to boost improvisation and revolution, to keep the country at the forefront of growth. They provide financial relief for businesses involved in qualifying R&D activities. This can reduce the company’s tax bill or result in a cash payment.
There are two main schemes:
The SME R&D Relief Scheme: This scheme is aimed at small and medium-sized enterprises (SMEs) and offers the most generous benefits. To qualify, a company must have fewer than 500 employees and either an annual turnover not exceeding €100 million or a balance sheet not exceeding €86 million.
The Research and Development Expenditure Credit (RDEC): This scheme is available to large companies and certain SMEs that do not qualify for the SME scheme. It provides a tax credit, currently at 13% of qualifying R&D expenditure.
More recently, the government merged these schemes to streamline the application process and help businesses claim more easily.
The merger means that the distinction between SME and large companies is less rigid, allowing a more simplified approach to determine the relief a company is eligible for. This unification aims to reduce administrative burdens and make the benefits more accessible to a wider range of companies. Let’s see how this one plays out over the coming year or so.
Why Businesses Might Be Missing Out
Despite the substantial benefits, many businesses are not taking advantage of R&D tax credits. There are several reasons for this:
Lack of Awareness: Many businesses simply do not know that they are eligible for R&D tax credits. This is particularly true for companies outside the traditional high-tech sectors. You’ll be pleasantly surprised at what may qualify.
Misunderstanding of Qualifying Activities: Companies often underestimate the scope of activities that qualify for R&D relief. It's not just about scientific research; developing new products, processes, or services, or improving existing ones, can also count.
Complexity of the Claim Process: The process of claiming R&D tax credits can be perceived as complex and time-consuming, deterring businesses from applying. We seek to overcome these beliefs by providing an extremely thorough and streamlined, 10 day turnaround process which we know clients enjoy!
HMRC Clampdown: Over the last 18 months or so, due to inflated and fraudulent claims, HMRC has been scrutinising claims more rigorously, which has scared some businesses away. This shouldn't be the case.
At ASWATAX, we have successfully defended many claims, demonstrating that HMRC’s process and understanding are often incorrect. With proper documentation and expert guidance, we ensure your claim can withstand this increased scrutiny. We know the BEIS guidelines like the back of our hand and therefore, a lot more equipped with knowledge and experience compared to some of the freshly recruited caseworkers within HMRC.
The Benefits of Claiming R&D Tax Credits
Claiming R&D tax credits can offer numerous benefits to your business:
Tax Savings: For SMEs, the R&D tax relief can enhance the value of qualifying expenditure by an additional 86% (reduced from 130%). This means that for every £100 spent on R&D, the company can reduce its taxable profits by an additional £86, resulting in significant tax savings.
Cash Flow Improvement: Even if your company is not making a profit, the R&D tax credit can be converted into a cash payment from HMRC. This can provide crucial funding for further innovation or day-to-day operations. Moreover, if tax was paid for the last financial accounting period for example and we were to prepare an amended claim (can go back two years), the tax previously paid would also be refunded.
Competitive Advantage: By reinvesting the savings or cash credits into further R&D, businesses can stay ahead of competitors through continuous innovation. Cash is king in such industries.
Broader Scope of Qualifying Activities: Activities across various industries, from software development to manufacturing, can qualify. This broad scope means more businesses can benefit from the scheme.
Popular Industries Benefiting from R&D Tax Credits
While many people associate R&D tax credits with high-tech sectors, a wide range of industries can benefit, including:
Artificial Intelligence (AI): Developing new AI models, improving machine learning algorithms, or creating innovative AI-driven products.
Software Development: Building new software, improving existing software, or integrating new systems.
Manufacturing: Developing new production processes, improving product quality, or enhancing manufacturing efficiency.
Engineering: Innovating in product design, developing new engineering solutions, or improving existing engineering processes.
Robotics: Creating new robotic systems, enhancing automation processes, or developing advanced robotic technologies.
How ASWATAX Can Help
Navigating the complexities of R&D tax credit claims can be daunting. This is where ASWATAX comes in. As Chartered Tax Advisers, we specialise in ensuring businesses maximise their R&D tax credit claims efficiently and effectively.
Here's how our streamlined process works:
Initial Consultation: We start with a consultation to discuss your projects and assess the validity of a potential claim. If your projects qualify, we take on the project. If not, we tell you upfront to avoid wasting your time.
Formal Engagement: Once we decide to proceed, we engage formally. We send you a detailed questionnaire and information requests to gather all necessary data.
Information Scrutiny: We thoroughly review the information provided and arrange a call to discuss any further details.
Technical Report Preparation: Our in-house experts prepare a detailed technical report outlining the qualifying projects in accordance with BEIS guidelines.
Financial Preparation: We work closely with your accountants or finance team to prepare and finalise the financial details of your claim.
Final Review and AIF Submission: After a final review and any necessary changes, we complete the Additional Information Form and prepare for submission.
Submission or Amendment of CT600: We handle the submission or amendment of the CT600 to HMRC, ensuring everything is in order.
We’ve designed our process to be swift and comprehensive, typically delivering results in just 10 days to minimise disruption to your business. We also include a full HMRC defence enquiry package to give you peace of mind that your claim has solid support.
Recent case studies
Seaweed robotics
In its first year, a start-up spent hundreds of thousands using advanced robotics and AI to transform seaweed farming. Their technology, involving swarms of monitoring robots, significantly reduces the cost and effort of monitoring seaweed farms. This innovation is crucial as seaweed captures significantly more carbon than land-based trees.
We helped SO Ltd, a loss-making company, secure £75,000 in cash back through R&D tax credits. The founders, the internal finance team, and their accountants were highly satisfied with our work. We've been re-engaged for the next financial year to continue supporting their R&D efforts.
Food processing
Say P Limited, a company in the food processing industry, has been conducting significant R&D related to recycled PET (rPET) to comply with upcoming regulations. Their innovative efforts focus on improving the quality and sustainability of their packaging materials.
We helped P Limited claim enhanced R&D expenditure of approximately £600,000 after being introduced by their accountants. This resulted in a full tax refund for 2023. We anticipated £300,000 in FY2024 profits, so we wiped this out and carried forward relief for future profits. This is a massive win for the company, ensuring continued innovation and financial stability.
Conclusion
R&D tax credit relief represent a significant opportunity for UK businesses to unlock substantial tax savings and improve cash flow, enabling further investment in innovation. Despite the complexity of the process, the benefits far outweigh the challenges, especially with the support of experienced professionals at ASWATAX.
As the founder, I am personally committed to ensuring that your business maximises its R&D tax credit claim with minimum hassle. Our team is dedicated to providing you with the best service possible, and our track record speaks for itself. We understand the intricacies of HMRC's requirements and the new compliance and reporting procedures that were recently introduced. We are here to guide you every step of the way.
Don't let your business miss out on this valuable incentive. Contact us today for an initial ‘feasibility’ consultation.
Innovate, save, and grow with ASWATAX – your trusted partner in tax advisory.
The Labour Government and Inheritance Tax
Why Inheritance Tax Planning Is More Important Than Ever
Inheritance tax planning is becoming increasingly critical for high-net-worth individuals, business owners, and property landlords in the UK, particularly in light of potential changes proposed by the Labour government. With an emphasis on reducing wealth inequality, Labour has signalled potential reforms aimed at increasing inheritance tax rates and lowering thresholds, which could significantly impact the estates of affluent families.
High net worth individuals (HNWs) and landlords are particularly at risk, as business owners can explore Business Property Relief (BPR), although it’s worth noting that I often see business owners 'dabbling' in property investments, which complicates their tax planning.
Why Proactive Planning Is Crucial
As a forward-thinking adviser, I would recommend that it is essential to proactively assess and revise estate plans to mitigate potential tax liabilities. This includes leveraging lifetime gifts perhaps, or establishing trusts, but ultimately exploring tax-efficient structures to ensure that wealth is preserved and transferred according to the individual or family's wishes while minimising the tax burden. It's always a balancing act!
Furthermore, it is prudent for high-net-worth individuals (particularly non-doms) to stay informed about these potential policy shifts and consider the timing of their wealth transfers. Engaging in early and strategic planning can provide greater flexibility and control over how and when assets are distributed.
Structures That Can Help You Stay Ahead
By incorporating a mix of current gifting, trust formation, Family Investment Companies (FICs), onshore and offshore pension funds, and charitable donations, families can not only reduce the impact of increased tax rates but also align their financial legacy with personal values and philanthropic goals.
Family Investment Companies (FICs) are increasingly popular among HNWs for their flexibility and tax efficiency. They allow for the accumulation of wealth within a corporate structure, where growth can be taxed at corporate tax rates rather than higher personal rates. FICs enable families to maintain control over their investments while benefiting from a potentially lower tax regime, making them a valuable tool in inheritance tax planning.
Trusts are another powerful tool in the inheritance tax planning arsenal. They can provide control over the distribution of assets and offer tax advantages, but they require careful structuring to align with the latest tax regulations. Trusts can help segregate and protect family wealth, ensuring that it is managed and passed on according to the family's wishes, while potentially mitigating the impact of inheritance tax.
Trusts: Control, Protect, and Pass on Wealth
Understanding the potential policy shifts and their implications is crucial. The Labour government’s proposals may include increasing the inheritance tax rate and reducing the nil-rate band, making it more challenging to transfer wealth to the next generation without substantial tax liabilities. Therefore, it is vital to stay ahead of these changes and implement strategies that can safeguard your wealth. For instance, lifetime gifts can reduce the size of your taxable estate, but they need to be carefully planned to avoid unintended tax consequences.
Pensions: SSAS and QNUPS as Inheritance Tax Solutions
SSAS (Small Self-Administered Schemes) and QNUPS (Qualifying Non-UK Pension Schemes) offer additional avenues for tax-efficient inheritance planning. SSASs provide flexibility for business owners to make pension contributions, which can then be invested back in the business or other assets. The immediate benefit here is the Corporation Tax relief that is available on pension contributions into the SSAS.
QNUPS offer opportunities for UK and non-UK residents to accumulate pension savings without the limitations of UK pension regulations, providing tax deferral and potential inheritance tax benefits. One particular difference between a SSAS and QNUPS is that you can invest in residential property within the QNUPS, where with a SSAS, you are restricted to commercial property. Still all positives though. Ultimately, any assets held within these pension wrappers are immediately free from inheritance tax.
Staying One Step Ahead with Strategic Advice
In this evolving tax landscape, working closely with tax advisers (and estate planners) who understand the nuances of proposed legislative changes is paramount to safeguarding family wealth and ensuring long-term financial security (not losing 40% per generation to HMRC).
Our UK and international tax advisory knowledge and awareness can come in handy. We can help navigate the complex interplay of local and international tax laws to develop a robust inheritance tax strategy.
Moreover, maintaining an ongoing dialogue with your advisers ensures that your estate plan remains effective in the face of changing laws and personal circumstances. Regular reviews and updates to your plan are essential to adapt to new opportunities and challenges. Our approach is holistic, taking into account not only the tax implications but also the personal and familial goals of our clients. Always happy to have a chat. 😊
Meet Omar Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here on his blog and on other channels such as LinkedIn. Book a call today to learn more about what Omar and ASWATAX can do for you.
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