R & D Tax Credits – Is It Worth It?
Research and Development tax credits are probably the most valuable tax benefit available to UK companies developing new products – yet thousands of eligible companies are missing out. We talked to William O’Brien from WOCO about why uptake of R&D Tax Credits is still so low, and what they can mean in real terms for ByteSnap’s customers.
Q: Lots of people have heard of the R&D scheme yet still don’t claim. Why’s that?
A: Sometimes neither a company nor their accountant recognise that it actually qualifies. But even in those cases where a claim is thought about, an accountant lacking technical knowledge will need to ask the client to write the R&D report supporting the claim. As a result the report only claims a fraction of what qualifies or the client never gets round to writing it at all! We had a recent case where a cautious client had claimed £600 in relief, which was increased to over £40,000 after we were brought in.
Q: Is it an onerous process for the company making the claim?
A: Certainly not. We typically need a single 2hr meeting with a client to get enough technical information to write the report for HMRC.
During that meeting we will agree a simple list of the numbers needed to do the calculations which can be sent to me by your financial people. After that the process is handled by us and the customer’s accountant, with the customer’s only role being to approve the final submission. I spent 20 years working as an engineer so I can speak the same language as their technical staff.
Q: What activities will qualify?
A: You have to set out to make an advance using science or technology, which is a very broad definition, where most companies involved in electronics and software design will find a significant part of what they do qualifies. Advances can be in either products or processes; for example, a redesign of a product such that it has the same functionality but now costs half as much to manufacture would qualify.
It’s hard to be specific about costs as quite a wide range of activities can be included. Generally speaking, the qualifying costs are profit & loss items such as such as staff salaries and materials consumed during the development project – like prototypes and testing costs. Items such as capital equipment or dividends (which affect the balance sheet) are excluded.
One important allowable cost is that of subcontractors, where the R&D tax credit can significantly reduce the project cost when using highly skilled specialists such as ByteSnap.
Q: How much is it worth to one of our customers?
A: Roughly speaking you can receive around £25 for every £100 spent, either as a tax refund (if you already paid tax) or as a payable credit (if you are in a loss making position). The 2014 budget actually increased the amount you can claim in certain circumstances to nearly 33% for the 2014/15 financial year and beyond. In short, you can’t afford to ignore it!
The rules for subcontracted work are slightly different, but as an example, spending £100k with a company such as ByteSnap would generate an additional tax credit of just over £16k. For a profitable company that means that the net cash impact of that £100k project would be just £64k.
Q: What are the benefits of using an R&D specialist?
A: It saves time, for both you and your accountant. With over 20 years’ experience as a scientist and engineer I can easily spot all relevant R&D activity usually by way of a single meeting with technical & finance staff. The process is risk-free as there are no upfront fees, and our record with HMRC is 100%. We charge a small percentage of the tax saved, and that is only payable once you have received your payment, so you are never out of pocket.
William O’Brien is a director at R&D Tax Credit specialists WOCO
HM Revenue & Customs