Research and development (R&D) often conjures up images of scientists striving to find a cure or invent a revolutionary gadget, but it’s much more diverse than that.
It encompasses a plethora of activities and exists in all industries, meaning there are billions of pounds worth of R&D tax relief that can be claimed, yet only 60,000 claims are made each year. R&D tax relief is designed to reward companies attempting to make technological advances within their sectors. This article highlights some of the misconceptions around R&D and provides accurate, no-nonsense advice.
1. We don’t do R&D, it’s just business as usual
A common reason for people not applying for R&D tax relief is that they see their commercial activities as business as usual rather than R&D. Justine Dignam, Director of Tax Incentives & Reliefs at Markel Tax, says: “It’s not uncommon for us to meet with companies who are unknowingly fulfilling all the qualifying criteria for R&D relief – they are continually developing products or processes which meet the demand of an ever-evolving market, or simply responding to a customer request to develop an existing product.”
There are three factors to consider when identifying R&D, and they are evident across all industries:
- The company must be trying to make an advance in science or technology that is more than simple, minor or routine upgrades – so the product or service should be evolving.
- There must be technical uncertainty – so you have to be trying to overcome a problem.
- A competent professional in the field can’t easily work out how to overcome the uncertainties – so someone else in the industry wouldn’t know how to do it, or the solution isn’t available in the public domain.
2. R&D is just for pharmaceutical companies and tech businesses
For a project to be classed as R&D, there must be an advance in science or technology. This terminology causes people to assume that R&D tax relief is only applicable to a handful of projects, but that’s not the case. As well as referring to the creation of a state-of-the-art product, it can also mean making a significant improvement to an existing process. This could mean making something faster, cheaper, lighter, more environmentally friendly and attractive to the market, because you’ve been driven to do so by demand.
R&D can be seen in every sector. Justine provides an example: “Let’s say I manufacture a ceramic mug and one of my customers asks me for the same mugs, but for 80p instead of a pound. In order to satisfy the market demand, I might try to make the density of the ceramic mug finer, so I use 20% less materials in production. But if I do that, is it going to fracture in the dishwasher? There are lots of technical uncertainties around doing something different. And this development work is where the R&D qualifying expenditure is often found if there are significant advances in the product development.”
3. It will take up too much time
Often, companies avoid exploring R&D claims because they think it will be a long process. In reality, it’s simple and quick to establish whether companies have a claim. Justine explains the process: “An accountant introduces us, and we then have an initial ten-minute phone call, after which we’ll know if they’re doing R&D or not. If a project does qualify, we’ll talk to them further about the project and tease out the technical information. We put together the whole claim and technical report before agreeing it with the client and submitting it to the revenue. It’s a well-oiled machine.”
4. It’s not worth being on HMRC's radar
Another deterrent to businesses submitting claims is the concern that they may get in trouble with the revenue and be asked to pay it back. HMRC have demonstrated their commitment to R&D tax relief and have pledged to process 95% of all claims within 28 days of receipt. However, HMRC have also moved at least 100 additional compliance officers to R&D enquiry work, and it is therefore essential that only valid claims are submitted by businesses. This is why it is critical to use a reputable R&D service provider.
Justine says that Markel has a “100% success rate”. While a technical report isn’t legally necessary, it is good due diligence and provides reassurance that if HMRC have any queries about the submission, all the details are readily accessible.
The average claim in the UK is £64,000, and you can usually claim for the previous two accounting periods. SMEs can claim up to 33p for every £1 spent on qualifying R&D activity, and large businesses 11p for every £1 spent. In these times of uncertainty, an R&D claim could be a lifeline.
5. Our accountants would have told us if we’re doing R&D
While accountancy firms may have specialist teams, not all will have a dedicated team of R&D specialists with in-depth sector knowledge and expertise. A misconception people have is that their accountants will already be well versed on the intricacies of R&D tax relief and that they would have told them if their projects were eligible.
R&D is a very specialist area, however, and there is a risk that if a general practitioner or non-specialist firm undertakes the R&D work themselves, they might not recognise something that qualifies, might not maximise the claim or might put in a claim that doesn’t actually qualify. Justine’s analogy is: “If I’ve got a heart condition, I wouldn’t expect to go to my GP and have him say, ‘I’ll give it a go’. The GP would identify the need to speak to someone else and refer me to a specialist in that area. And that’s exactly the same for an accountant. Unless they specialise in R&D, they will and should approach a specialist.”