R&D tax credits: Funding that rewards innovation
To find out more about R&D tax credits as a funding option for businesses, Business Leader spoke to Jenny Tragner CA ATT, Technical Director at R&D tax relief consultancy ForrestBrown.
How do I know if I’m eligible for R&D tax credits? What is this tax relief?
Research and development (R&D) tax relief is a government incentive designed to reward UK companies for investing in innovation. It’s a valuable source of cash for businesses to invest in accelerating their R&D, hiring new staff and, ultimately, growing.
Companies that spend money developing new products, processes, or services, or enhancing existing ones, may be eligible for this relief. R&D tax relief reduces a company’s Corporation Tax liability or provides a cash payment. If a business is making a claim for the first time, it can typically claim R&D tax relief for its last two completed accounting periods, if it meets the criteria.
Is this relief just for traditional sectors or are you seeing a broadening of the types of businesses that can apply?
Despite some misconceptions, this incentive always has been available to any sector. From cheese-making to chemical engineering, to construction and digital development, R&D can occur and apply equally to any field of science or technology.
A word of warning, there’s a lot of misinformation swirling around regarding the types of projects that attract relief, particularly from opportunistic, spurious advisers looking to take advantage of companies who may have made adaptations in response to the pandemic. For example, we’ve recently seen spurious agents advertising to sectors unlikely to be R&D intensive, such as care homes and restaurants.
To protect your business, always work with a regulated R&D tax adviser.
Any trends you’re seeing in this space?
In his Budget 2021 address, Rishi Sunak announced a wide-ranging consultation into tax relief on private-sector R&D investment in the UK. It explores how this investment is supported or otherwise affected by the R&D tax relief incentives, and where changes may be appropriate. This is something to watch in the coming months – not least as HMRC is currently undergoing a seismic shift in its approach to the incentive to reduce errors and fraud.
As well as bolstering their R&D compliance team with 100 new staff, HMRC has started challenging SME R&D tax relief claims for customer-led R&D projects, on the basis that this R&D is subsidised by customers. As a result, businesses need to be more aware of the impact of their contractual arrangements on their R&D claims.
Software is a sector that HMRC is particularly concerned about, using its own software specialists to vet claims, and sending letters to some companies asking them to check their own claims for accuracy. We’re, therefore, placing enhanced importance on sector expertise to help clearly define project boundaries and articulate the R&D, while also ensuring relevant costs are captured.