We often wonder why so few companies claim R&D Tax Credits and based on our experience of helping with more than 1000 qualifying projects, for close to 300 SME clients over 11 years, is that many companies and their advising accountants simply do not recognise when they do R&D. Because of this, less than 0.50% of SMEs actually claim R&D Tax Credits. This is a real shame.
Why is this?
- Many companies do not appreciate the full scope of what is R&D. This can lead to no claim or low claims.
- Some accountants do not recognise R&D, often because their clients do not, or they have snippets of information which lead to wrong conclusions.
- Some accountants have had difficulties with HMRC relating to claims in the early days of R&D Tax Credits.
- Some accountants feel that an R&D tax credit claim will lead to enquiries into broader aspects of client affairs by HMRC.
- Companies are too modest.
- A smooth, full potential claim requires very good knowledge of the Guidelines and how HMRC deal with claims.
- With only about 8000 annual SME claims and over 30,000 firms of accountants in the UK, and many aspects of tax to deal with, is unreasonable to expect them to have a very high level of expertise in R&D tax credits.
Part of the reason is that people have preconceived ideas about what they do and their own impression of what is R&D in their company. They may feel that they must develop a “world’s first” something. This is not correct. We come across people who say things like this “if it is a government scheme the qualifying process will be too much hassle to make the effort worthwhile”. Nothing could be further from the truth. We meet people who have asked their accountant, who answered that “you would not qualify”. Each person has their own notion of what R&D actually is. This is based on their experience. Comments which have been quoted to us have included, “you are engineers, not scientists, so you would not qualify” or “you only develop web sites so you would not qualify” or “you only develop computer games, so you would not qualify”
In the area of R&D Tax you will hear people talk about the aim of advancing science, and we have never met a company which sets out to do this. More typically, the company will want to adapt science or technology, or develop the capability of science or technology to do something practical, such as make a new product, create a new service, develop a new manufacturing or operational process or create a new material.
While the resulting research and development is focused on resolving technological uncertainty, this work is R&D. Where consumables are used in the process they could qualify as direct R&D expenditure. Where there are indirect R&D costs they may also qualify.
The word “science” can be confusing but it continues to be used in a broad sense denoting “reliable knowledge about a topic” In this sense every industry and every company has its own “science”. Where a company adapts or develops that science in a way which is not “readily deducible by a competent professional working in the field” then that work could be R&D. What actually happens in practice is that competent professionals working for a company will have an idea to create a new and innovative product, service, process or material based on their current understanding of the related “science” and utilise or create technologies to deliver the end result.
If you have any doubt in your mind you do need to check with a specialist in the area, so do get in touch now.