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R&D Tax Credits Claims on the Increase for SMEs

HMRC has released its annual Research and Development Tax Credits Statistics for the years 2014-15 that show an increase in R&D tax credits claims

Here is a summary of the key points:

  • ​16% increase in number of SME R&D tax credits claims from 16,005 (2013-14) to 18,630 in 2014-15
  • £325m increase in tax relief claimed by SMEs topping £1bn in total in 2014-15
  • £21.8bn of R&D expenditure qualifying for R&D tax relief  
  • Manufacturing, Professional, Scientific & Technical plus Information & Communication sectors made the greatest volume of claims - 77% of total claimed

16% increase in number of SME R&D Tax Credits claims up to 18,630 in 2014-15

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But it wasn't all necessarily good news - reading between the lines:

  • 22,445 total number of R&D tax credits claims out of c5m companies in the UK - suggests many are still missing out...
  • The North East, Wales and Northern Ireland appear to under claiming relative to other areas of the country (with the South East, West Midlands, North West and London fairing well)
  • Construction, Wholesale / Retail, Transport and Food are sectors that are under-represented in R&D tax claims relative to number of returns filed 
  • Overall growth in claims falls behind the previous year's growth

22,445 total number of R&D Tax Credits claims V c5m companies in UK - suggests many still missing out...

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Here are our thoughts on the statistics announced:

"We are continuing to see increasing numbers of claims for R&D tax credits as general awareness seems to be on the increase - our experience in relation to the sharp increase in IT & Software related claims definitely bears this out with huge numbers of successful claims

But more evidently still needs to be done as the growth in number of claims has slowed in 2014-15

For the total number of companies that are taking a risk in seeking to develop new products or services to be pegged at 22,445 looks like an understatement to us - 22,445 out of c5,000,000 companies....really?"

There is a time-lag as these stats relate to 2014-15 - we expect to see a further uptick to the stats for 2015-16. 

How do you claim R&D Tax Credits?

It can often be confusing understanding how R&D tax credits are actually claimed by companies.

After all, there are a whole myriad of funding options out there including:

So where do R&D Tax Credits fit in and how are claims made?

R&D Tax Credits claims are filed with HM Revenue & Customs (HMRC) within your company's corporation tax return - called a Form CT600.

CT600 to claim R&D tax credits

​Your company is required to file a corporation tax after each financial accounting period in order to calculate and disclose to HMRC the amount of corporation tax payable or tax losses claimed.

The CT600 is normally accompanied by a Corporation Tax Computation which shows the details behind the calculations shown in the CT600. To most people, the CT600 is hard to follow as it simply plucks out relevant figures from the corporation tax computation to allow HMRC to extract and process the information they need.

The processing of tax returns is largely automated these days as tax returns, computations and accounts are ​coded into a form of computer language called iXBRL - but you don't need to worry about this (unless you are filing your return yourself!).

Where does the R&D Tax Credit claim go in the CT600 tax return?

The R&D tax credits claim figures for an SME that is claiming an R&D tax credit payment from HMRC will complete the following boxes within its CT600: 

  • Box 530 - Research and Development Credit - the amount of the R&D tax credit claimed
  • Box 545 - Total of Research and Development credit, and creative tax credit - in most cases the same figure as in Box 530
  • Box 570 - Surplus Research and Development credits or creative tax credit payable  - in most cases the same figure as in Box 530
  • Box 660 - R&D Enhanced expenditure - the enhanced R&D tax deduction i.e. the uplifted 230% figure
  • Box 670 - R&D and creative enhanced expenditure - in most cases the same figure as in Box 660

Note that our comments are in italics above and that this relates to a new version of the CT600 for accounting periods starting on or after 1 April 2015

A couple more important Boxes not to miss out on the CT600 if you want to ensure a speedy processing of your R&D tax credits claim by HMRC:

  • Put an 'X' in Box 40 to confirm that a repayment is due for the period - for your R&D tax credit payment
  • Don't forget to include your bank details in page 10 to allow HMRC to process a bank transfer - much quicker than a cheque (especially when you take into account the fact that HMRC send mail second class!

Can I file my R&D Tax Credits claim early?

As noted above, your R&D tax claim is filed within your CT600 tax return. A return is necessary after each accounting period. 

This can cause potentially severe cashflow problems for some companies - especially early stage companies.

Imagine the worst case scenario in which a company elects to have an 18 month accounting period and bumps up against its statutory deadlines at each stage:

  • 18 months to the end of the period of account - before it can even start the process of recovering some of the R&D expenditure
  • Up to 9 months to prepare the accounts 
  • A further 3 months to prepare and file the CT600 including the R&D tax credit claim
  • 30 days for HMRC to process the claim
  • 10 - 14 days to receive payment

​That's nearly 2.5 years beginning to end!

Many entrepreneurs and founders are unaware of the potential time lapse between incurring the expenditure on qualifying R&D activities and getting a cash rebate from HMRC. Hopefully this highlights the potential issue...

A better plan for an early stage company might be to map out its cashflow and specific R&D milestones and consider 'shortening' (rather than lengthening as so many companies seem to do) its first accounting period to say 6 months. 

With a bit of impetus and focus, a well planned startup might be in a position to recover some of its R&D expenditure within less than one year from incorporation.

How far back can I make a claim for R&D tax credits?

A company is required to file a corporation tax return within 12 months of its accounting period end. So a company with a 31 December 2015 period end is required to file its corporation tax return by 31 December 2016.

​R&D Tax Credit claims have a two year time-limit in order to make a valid claim.

This means that it is possible to file a claim not only for its most recent period end (31 Dec 2015 in our example above) but also for accounting periods ended within the past two years. If the company had followed 31 Dec calendar year ends in previous periods, then it would be possible to file an amended return for the period ended 31 December 2014 before this time-limit expired on 31 December 2016.

​It is possible to make a claim for two or even three periods if a company had changed its accounting period end in the past two years and therefore these period ends still fall within the last two years.

It is worth noting that an accounting period for corporation tax purposes cannot last longer than 12 months. So an 18 month period of account would actually be made up of one corporation tax return covering the first 12 months and a second accounting period lasting 6 months. ​This is an example of where a company may have more than two open periods within the past two years.

Finally, don't dismiss how far you can go back in time to recapture historical R&D activities and expenditure if the opportunity of claiming R&D tax credits had previously perhaps passed you by....

At the time of writing this article (21 Sept 2016) a company with a period ended 30 Sept would find that it has its periods ended 30 Sept 2015 and 30 Sept 2014 still open for retrospective R&D tax claims.

Taking the 30 Sept 2014 period, a company might have carried out some R&D work in the first three months of this period - that's way back in 1 Oct 2013 - 31 Dec 2013 and this is still open for a claim - for 9 days (and counting.....).

7 Common R&D Tax Credits Misconceptions

It’s all too easy for entrepreneurs to get bogged down in the day-to-day of running a business. Time is scarce – especially when it comes to revisiting financial tax incentives. Yet it can make good financial sense to check out R&D tax credits (again).

The UK Government introduced R&D Tax Credits to support SMEs back in 2000. Yet still we find many companies that are not aware that they qualify for this generous tax incentive.  If this is you, then you may be leaving £40,000 or more on the table year on year.

Got your attention? Good, then please read on to see if any of the following misconceptions sound similar? Read Full Article

Developing & Funding R&D Strategies in the Food Sector

Nutri Wales Food innovation ip tax solutions
We will be speaking at the latest Nutri-Wales event on “Developing & Funding R&D Strategies in the Food Sector”.

Steve Livingston, Director at IP Tax Solutions will be presenting on “Using R&D Tax Credits to Fund Innovation” with a specific focus on the food sector.

This event will be held on Tuesday 22nd March 2016 at Village Hotel Chester St David’s, Ewloe, Flintshire, CH5 3YB from 8am.

This event is a re-run of a highly successful event that was held in Cardiff earlier this year. Other speakers include BIC Innovation, Innovate UK and KTN.

Patent Box – Deadlines loom

The Patent Box is a valuable UK corporation tax relief that aims to incentivise UK companies to invest in knowledge-intensive activities that generate valuable intellectual property that is protected under qualifying patents. The tax break allows companies to benefit from a reduced rate of corporation tax on profits attributable to the qualifying patents.

The Treasury recently announced that it had seen a positive uptake of the Patent Box since its introduction in April 2013, with 639 companies receiving a benefit totalling £335m so far. However, within the same timeframe this tax relief has unfortunately come in for its fair share of ‘stick’ with claims that it is ‘harmful’ and ‘anti-competitive’, especially in the light of the Eurozone. Following OECD discussions, the UK Government is seeking to amend certain provisions within the Patent Box incentive. The changes are being introduced with effect from 1 July 2016 – all is not lost, however, for potential new entrants to the scheme under the current / ‘old’ rules.

For example:

  1. Global groups seeking to optimise their overall global tax position could consider transferring patents into the UK from related parties before new anti-avoidance rules kick in; however, this must be carried out by 31 December 2015. Time is ticking so global groups are well advised to review their patent portfolios as a matter of priority.
  2. Companies that elect into the Patent Box regime by 30 June 2016 can benefit from the existing / ‘old’ rules under ‘grandfathering’ provisions until 30 June 2021. Note, however, that accurate records must be maintained during this period to allow for the new ‘nexus’ fractional rules to be applied thereafter.

The UK Patent Box continues to be a highly valuable tax relief and a useful ‘add-on’ to the R&D tax credit incentive for many companies. The new rules should not impact adversely on many UK SMEs as they are strongly linked with the underlying economic activity which, for most, will be within the UK. There is currently a consultation ongoing that ends on 4 December 2015 – we will keep you posted on developments.

 

R&D Tax Credits + Patent Box – Year end tax planning

Many companies will be fast approaching their financial year ended 31 December 2015. With just six weeks to go, now is a good time to consider tax planning opportunities, such as the availability of R&D tax credits and / or the Patent Box.

R&D Tax Credits Tax Planning Opportunity

With R&D tax credit claims on the increase (23% increase in SME claims last year), more and more companies are beginning to understand the breadth of scope in its application. Also, its generosity (with average UK claims of c£50,000)!

Yet there is more work that can be done, for example, for:

  • those companies that already claiming the relief – many may be underclaiming; or
  • the many hundreds of thousands of companies that have yet to make a claim – perhaps because they (wrongly) don’t believe that they are eligible…?

In either case, we highly recommend that you seek a second opinion from us or another R&D tax specialist firm. It costs nothing for an initial exploratory call – well, in our case anyway!

Patent Box Tax Planning Opportunity

For those companies that hold patents, the Patent Box tax relief might be overlooked as it is relatively new. It applies where qualifying patents are being used in products that are being sold to generate taxable profits. The Patent Box reduces the amount of corporation tax that would otherwise be payable on those profits. The Patent Box is a government tax incentive that is there to support, encourage and reward the inventive and risk-based work that the company has undertaken in order to secure a qualifying patent.

Both of these UK government tax incentives appear to be underclaimed by UK companies – so cash that might otherwise be invested in a company’s growth is being left on the table. The year end is always a good time to revisit all available tax reliefs to ensure that you are doing all you can to maximise the cash available to build and reinvest in your business.

R&D tax credits and the Patent Box might just be the missing festive ingredient…!

R&D tax credits / Patent Box claims timelimits – 31 December 2015

And don’t forget, if you have project work that qualifies for R&D tax credits in your 31 December years ended 2013 – 2014 then you still have time to file a claim for these periods – even if you have already filed your company corporation tax returns (with no claim for R&D tax credits relief).

You can file an amended return – this time including the claim for R&D tax relief.

But you only have until 31 December 2015 to file a claim for R&D tax relief (or the Patent Box) for the accounting period ended 31 December 2013 – otherwise the opportunity for this 2013 period will be lost forever. But right now (i.e. pre 31 Dec 2015), its not too late! 

Making R&D tax relief easier for SMEs

It is pleasing to see further emphasis being placed on the SME R&D tax incentive scheme with the recent launch of HMRC’s paper “Improving access to research and development tax credits for small business” which you can download by clicking here. (Or, to save you the bother, you can simply browse through the slides above that aim to capture the highlights!)
Key proposals include:
  • Increase awareness of the R&D tax relief scheme – HMRC will aim to engage with government agencies such as Innovate UK and other similar organisations e.g. Growth Hubs, to help identify companies that might also be eligible for enhanced R&D relief (if not already claiming). HMRC will also engage in further advertising and social media activities to help promote the benefits and availability of the R&D tax incentive over the next two years.
  • Introduction of a R&D tax HMRC advance assurance process aimed at small companies (defined as having turnover of less than £2m and fewer than 50 employees). The advance assurance scheme will be introduced this month (November 2015) and will aim to promote increased certainty for potential claimants.
  • Improvements to the online HMRC guidance – there was an acceptance that some of the online case studies and definitions within the HMRC guidance needs freshening up (especially for more tricky areas like software development) and HMRC will introduce new (more user-friendly) guides and templates to help small companies identify qualifying activities and expenditure.

Steve Livingston, Managing Director of leading innovation tax specialists, ip tax solutions commented:

“We are pleased to see such emphasis being placed on what is already proving to be one of the most valuable sources of funding for knowledge-centric companies across the UK.

R&D tax claims are already on the rise with £800m claimed by SMEs in 2013-14 and this raft of new measures can only help increase this figure further for the benefit of the wider UK economy.”

Get in touch to learn how we can help you.

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Summer Budget 2015 changes to R&D tax credits

George Osborne gave his first all-Tory Budget speech in 18 years last week and delivered few changes to the ultra-attractive R&D tax credits incentive that continues to go from strength to strength for clever UK companies.

There was just some tightening up in the rules aimed at Universities and charities to prevent them from claiming the RDEC with effect from 1 August 2015. This change gives effect to the intention of the RDEC to benefit companies in the private sector only which appears reasonable.

The decrease in the headline corporation tax rate to 19% in 2017 and to 18% by 2020 should provide further stimulus for more international companies to make the UK their home and potentially benefit from  the UK R&D tax incentive plus this reduced rate makes the RDEC even more attractive.

More broadly the changes to the taxation of dividends may indirectly benefit R&D claimant companies as founder shareholders will have less incentive to extract profits by way of dividends and may instead opt for higher salaries with the latter being a qualifying expense for R&D tax purposes.

£400,000 R&D tax credits for tech companies in one week

We are thrilled to have helped three UK technology companies secure R&D tax credit cash payments totalling £408,000 in the space of one week!

We are used to helping companies secure similar results but it is extra special when we can celebrate three such successes in the space of a few days. All three claims were agreed without query by HM Revenue & Customs which continues our 100% success record.

One of the claims was extra special in that a chance discussion with the CEO identified that he had incorrectly assumed that the company did not qualify based on its structure and the nature of its activities. Within 10 minutes, we helped identify why and how his assumptions might not be correct and brought about our considerable experience to explain how the company might qualify for SME R&D tax relief. Further, there was less than a week to go before the timeframe for making a claim would close! We worked quickly and closely with the company to pull together a robust technical report along with the claim calculations to justify the eligibility of the platform development work in line with the R&D tax legislation. The claim was filed on time.

Fast forward 21 days and the company received over £100,000 in cash from HMRC wired directly to their bank account!

The other two tech companies based in Manchester and London received R&D tax credit cash payments of £174,000 and £107,000 each within 28 days.

So don’t leave it to chance – call us for a 10-15 min conversation to explore whether you might have a R&D tax credit claim. With average claims in excess of £100,000 for these three companies, it would be a shame to miss out…!