R&D: What you should know to cut your tax bill

Nick Parkes, Director, at Derbyshire-based Shapcotts Accountants explains the tax advantages of R&D and outlines how you can make savings that benefit your bottom line

The availability for companies to make an additional tax deduction for costs relating to research and development has been with us for a number of years now, and the rates have been increasing year on year. This can lead to considerable savings.

Current legislation allows a company to claim 230 per cent of their qualifying costs, so for every £100 of qualifying expenditure in your profit and loss account you get an extra £130 deduction from your taxable profits. For companies spending considerable amounts on plant and equipment relating to research and development, there are more beneficial capital allowances available should your total expenditure in the year exceed the Annual Investment Allowance expenditure level in any year.

Should a company be loss-making, which can often be the case in the early years of trading and development, the additional tax deductions can be used to increase a loss to carry forward to set against future profit, or the R&D credit can be ‘cashed in’ at a rate of 11 per cent, which could prove very useful to companies in their early stages seeking funding.

If you have not already included a claim on your Form CT600 and believe it may be relevant, you still have twelve months from the submission deadline of your Form to be able to resubmit including the relevant information. So for most companies this will be two years from the end of the  particular accounting period.

As you would expect there are certain conditions to fulfil, and there are restrictions in relation to connected companies and those who are carrying out subcontract work on behalf of other companies. This would need to be looked into on an individual basis. There are a number of organisations who will assist you to prepare your R&D claim. They tend to have experts available in a wide variety of industries and usually charge a fee based on a percentage of the tax saving. For smaller claims there is also a department of H M Revenue & Customs who will lead you through the process. However in many cases it can be your own accountant who can assist with this process. The technical background can be provided from within your own company, and the accountant will assist in identifying the specific expenditure and processing the claim on the Form CT600.

So the question now has to be  ‘Is my company eligible for a claim?’. One thing must be clear. This is not just an incentive for companies with ‘men in white suits’. Those involved in such industries such as software, IT and pharmaceuticals spend vast sums on research and development as they try to keep ahead of competition or develop new treatments, but R&D claims can equally be applied to a variety of trades. They are not only for companies inventing something brand new for sale.

Equally the belief that if customers have paid direct for R&D to be carried out a claim is not applicable is equally incorrect. As an example I will list below a variety of trades and activities which can be eligible.

Construction

It is believed the construction industry is eligible for a much greater share of the R&D scheme that is currently being claimed. Innovation is a significant part of their activities and happens on a day to day basis. With each new project there are obstacles to overcome and unique challenges. These provide new approaches to take forward into further work. The R&D scheme should be seen to be encouraging problem solving. Are you taking a new approach to tackling a particular recurring problem? Are you developing a system that will provide a safer or ‘greener’ way to work? Are you adapting previous technologies to deal with a new process? Any of these would create costs potentially eligible for a claim.

Food and Drink

Those involved in the food industry have a number of issues requiring constant attention. These range from the need to stay ahead of the competition and legislative changes. This will involve some or all of the following. Recipes need to be developed and improved upon. You may have a separate kitchen where this work is undertaken and costs can easily be established. Interaction between ingredients needs to be established and how they react to methods such as freezing, cooking, distilling, etc. Consumer trends need to be followed. Packaging, preservation methods and general processing techniques need to be adapted and all will involve a degree of cost eligible for R&D.

Printing and Packaging

The industry has developed rapidly in recent years and now forms one of the largest in the UK. It has needed to adapt to changes in the technology of printing methods and developing a variety of paper products to keep relevant to the modern world. This will have, and will continue to, require constant development of processes and products. This again creates an additional cost which will be eligible for a claim

The relevance to technology and manufacturing companies is applied in exactly the same manner. Remember, it is not necessary that this expenditure is successful in its aims. It needs to be identifiable as the company making efforts to develop. If that is the case then such a claim should be considered. If you feel that any aspect of your business would fall into this category, contact your accountant to discuss the position, and don’t delay or you could miss out on claims for earlier years. This is a significant tax saving area and should not be overlooked.

About Business Matters

Business Matters staff