R&D tax benefits – an opportunity to unlock funds?

Last updated 27 March 2020

Businesses are facing many new challenges brought about by the coronavirus pandemic.

The immediate short-term challenge will be to maximise cash flow in order to weather the financial storm. In the longer term many businesses may need to undertake rapid innovation to adapt and remain viable in a post coronavirus world. It might even be the case that the nature of business’ trade changes, such as a manufacturer switching from car parts production to healthcare products.

With this in mind, it is worthwhile considering whether your company could either

• Accelerate existing Research and Development tax relief claims, or
• Consider making or maximising potential claims where these have not been made before

It is possible to make a claim up to two years after the end of the accounting period concerned. For example, the deadline for making a claim for 30 April 2018 would be 30 April 2020.

For successful claimants, R&D tax credits can provide a fantastic opportunity to unlock valuable additional funds, facilitating a positive impact on cashflow.

It is crucial to note that you don’t have to be a ‘technology’ company in order to be eligible for the R&D tax schemes. In fact, the schemes have been purposefully designed in order to encourage R&D within a diverse range of sectors, providing that qualifying activities are in undertaken.

So what are exactly are the R&D tax schemes and how do they work?

Where qualifying R&D activities are or have been undertaken by a company a claim can be made under either the SME or the Research and Development Expenditure Credits (‘RDEC’) schemes.

• The SME scheme – this can provide an additional ‘super deduction’ of 130% of qualifying expenditure. This means that qualifying expenditure will obtain a 230% tax deduction. A claim under the SME scheme can:
  • reduce taxable profits, resulting in a tax refund where tax has already been paid, or a reduction in the corporation tax payable by a company.
  • create or enhance a tax loss.
  • Give rise to a repayable tax credit of up to 33.36p for each £1 of qualifying expenditure.

• The Research and Development Expenditure Credit (“RDEC”) scheme – this is available to larger companies or smaller companies which do not qualify under the SME scheme. This can provide a tax credit equal to 12% of qualifying expenditure for periods before 1 April 2020 and following the 2020 Budget 13% with effect from 1 April 2020.

What are qualifying activities?

A company has undertaken qualifying activities when it is has sought an advance in either science or technology. It is important to note that the relief is not just for ‘white coat’ scientific research but also for any development work in design and engineering that involves overcoming difficult technological problems.

This can include creating new processes, products or services, making appreciable improvements to existing ones and even using science and technology to duplicate existing processes, products and services in a new way.

It is important to note that R&D projects do not need to be successful in order to be eligible.

Case studies:

Some practical examples of qualifying activities include:

• A manufacturing company – The advance could relate to adapting machinery or procedures to change a production line to manufacture healthcare products.
• A software developer – developing new code to interpret Big Data using AI and machine learning. The advance sought was how to achieve scalable code.
• A scrap metal merchant – The advance concerned the work undertaken to continually enhance and modify their plant to increase the percentage of scrap metal recovered and decrease the material sent to land fill.
• An engineering company – The advance sought related developing new processes to achieve seals which are able to withstand great pressure, heat and impact.
• A brewery – the advance sought related to them seeking to develop consistent brewing techniques which could be scaled up for mass production whilst maintaining consistent quality and taste.

If you think you may be eligible to claim and would like to discuss this further please do not hesitate to get in touch by contacting our R&D experts.