We spoke with Ollie Armes from Oldland Consulting to better understand who qualifies and what to be looking out for.
What is R&D?
R&D Stands for Research and Development and it’s this phrase that often puts most people off the scheme. In reality, it should probably be called the Research OR Development Tax Credit scheme as less than 5 per cent of our clients are actually conducting true research.
So this scheme isn’t just for companies employing ‘men in white coats’ then?
No, far from it. The Scheme was set up to both encourage and reward companies to innovate. Innovation takes many forms, from the development of a piece of software or a manufacturing process, through to the design and testing of an item or accessory. Just because these companies are not making drugs or discovering new elements on the periodic table, it doesn’t mean that they cannot claim the tax benefit of their own investments in innovation.
So they just have to invent something new then?
Not at all. The scheme does not discriminate in that way. Both re-invention and material improvement of existing product, process or software would represent qualifying activity under the scheme. Just because one you your competitors came up with something new, that does not preclude you from benefitting in your endeavours to replicate or improve upon their invention.
Is there a catch?
There is no ‘catch’. There are a set of criteria that a company needs to comply with to enable them to take advantage of the scheme, but they are not overly restrictive. Generally speaking (as there are a few exceptions) a limited company, which is investing money at its own risk to develop or materially improve a product, process or software package, is likely to qualify. Even if they do not actually succeed in achieving what they set out to, it is normally possible to claim benefit against this expenditure.
How much can a company actually claim?
The current legislation allows for anything up to 33.35 per cent of the qualifying expenditure on R&D to be claimed back from HMRC. So for every £100,000 of qualifying spend, up to £33,350 can be claimed back from HMRC under the SME R&D Tax credit scheme, although most companies claim nearer to 25 per cent in reality.
As it’s a ‘Tax Credit’ scheme, I assume a business need to be making profits to benefit?
Ironically, they don’t. Through the creation of something called a Payable Tax Credit, HMRC have extended the scheme to also benefit loss making businesses. In fact, its only loss making businesses that are able to benefit from the top rate of 33.35 per cent. Profit making businesses are only able to claim a maximum of 26 per cent of qualifying spend back.
That’s great news for a lot of SME’s and start-ups. So what do our readers need to do to get involved in the scheme?
The legislation relating to R&D Tax credits alone is around 300, A4 Pages long so we would always recommend engaging with a professional to ensure they are getting maximum benefit from the scheme. It is a very niche and often misunderstood area of accounting, so your accountant might not actually be the right people to get help from. In fact a large percentage of our leads actually come from accountants who refer their clients to us for help in this area as it is all too easy to claim for costs which do not qualify or miss out on ones which often get overlooked!
Whoever your readers choose to work with we would encourage them to do their homework. Speak to the consultants about their own experience and success rates as well as their fee structure, remembering that cheapest is not always best! Finally, avoid any upfront fees, or signing contracts which tie you in for multiple claims and only ever work with people that charge a success based fee (ideally as a % of your claim, so you are guaranteed to only see an improved cash position after engagement)