No surprises then that most people and businesses believe R&D is the exclusive preserve of the world’s biggest companies involved in science, advanced technology and pharmaceuticals.
But nothing could be further from the truth. In the 2014/2015 tax year normal, everyday SMEs were responsible for more than four in five UK R&D claims.
For example, a restaurant creating a new recipe, a brewery experimenting with a new pint or a start-up or SME business trying to streamline its IT by integrating some proprietary cloud technology could all be eligible for R&D.
The ‘people in white coats’ myth urgently needs to be debunked because currently SMEs are losing out not just financially but also strategically: R&D can put them one step ahead of the competition, both at home and overseas.
What is R&D tax relief?
Because R&D is inherently speculative, and has the potential to genuinely improve both the sector it is in and the broader economy if successful, the government offers businesses tax relief on any activity that qualifies as R&D.
Not just in terms of the raw materials required but also the time spent on it.
R&D tax credits are essentially the government’s way of rewarding innovative companies for developing new, or appreciably improving existing, products, processes, systems and materials — activities that are intended to increase the UK’s wealth creation capacity.
What type of work is classed as R&D?
Here’s the thing. Too many people believe that R&D is an activity typically carried out in laboratories or involves something pretty high tech that the average SME simply wouldn’t understand.
This is wrong.
In fact, the basic requirement for an R&D tax claim is for the business in hand to 'have developed a new product or service, and/or implemented a new business process over the past two years'.
Once you look at it like this, countless businesses in all sectors and of all sizes could be eligible – and indeed are.
Sadly, there’s just not enough awareness about R&D.
What can SMEs claim for?
If you are developing a new product or service, improved an existing one or implemented a new business process then that could be R&D.
Common types of qualifying R&D expenditure include the cost of staff used to carry out the R&D work, any supporting software, travel costs, utility bills such as power and water, certain payments to subcontractors, and any fees incurred in creating a prototype.
How much can you save by claiming?
Firms can secure tax relief in excess of 30 per cent of their investment (in time and materials) in R&D. The exact figure will often depend on the individual claim but on average roughly 25 per cent is the norm.
The average tax benefit at Catax to date (we have secured more than £136million in tax relief overall) is £39,000 — certainly not small change.
Please note, though, that R&D tax benefits only apply to those businesses that are liable for corporation tax. They can help to reduce a corporation tax bill or be claimed as a cash sum as a reimbursement from the HMRC due to an overpayment of tax.
I think I might be eligible. How do I claim R&D tax relief?
You need to have performed an eligible activity and to be a company to make an R&D claim. If you have and are, there are a number of ways to make a claim for R&D.
One is to do it yourself online through your company tax return. Another is to ask your accountant or use a specialist R&D tax relief company.
How far back can I claim R&D tax for?
Any company that might be eligible for claiming R&D tax relief should act quickly - R&D tax claims can only go back two tax years. If you don’t use them, you lose them.
Why don’t UK SMEs claim more regularly for R&D?
We recently surveyed 500 UK SME business owners and found that half of them have never even heard of R&D tax relief.
Some 57 per cent of respondents said they have developed a new product or service, and/or implemented a new business process over the past two years — the basic requirement for an R&D tax claim.
But despite the Chancellor reiterating the importance of R&D in the Spring Budget, over four in 10 SME owners think it is restricted to specialist tech, drug and science companies. In reality, R&D can be claimed by companies of all sizes from all sectors.
Furthermore, 43 per cent of UK SMEs also mistakenly believe that any eligible R&D activity has to be successful and integrated into a business for a claim to be made. This is not true: the outcome of the R&D is irrelevant – what matters is the time and money spent.
The ongoing lack of awareness around R&D and the eligibility criteria that apply to it is costing the UK’s SMEs potentially hundreds of millions in tax relief each year.
Mark Tighe is chief executive of Catax (This is Money)