In June 2016, the UK voted in a referendum which decided that the country would leave the European Union, in a process that has become known as “Brexit”. There has been much uncertainty since that time and no one really knows what Brexit really means. It is likely that this will start to become clearer in the months ahead. In the meantime, however, one question that many businesses have been wondering about is what the results of the referendum and the consequent Brexit might mean for R&D funding, and in particular, R&D tax relief and credits.
It is possible to speculate that R&D tax relief and credit are likely to continue in the medium term. Studies have shown that far from being a cost to the UK economy, the scheme is an investment. It has been illustrated that the R&D scheme in the UK leads to a higher overall GDP and increased investment in business. In a newly-liberated UK which needs to compete even more effectively in the global market place than ever before, this alone makes a compelling case for maintaining the scheme moving forward.
Another factor to consider is that the UK may even make its R&D tax relief and tax credit scheme more generous. Currently, the UK is constrained in what HMRC can offer to businesses in terms of tax relief and credit under European Union Law. As Aiglon Consulting points out, the SME scheme for tax relief and credit in the UK is currently an EU State Aid. As a result of this, it is necessary for the government to seek approval from the European Commission prior to making alterations to the scheme. The current scheme has been limited by a cap, this means that R&D tax relief in the UK is effectively kept in check by the European Union. It is possible that the cap may be lifted was the United Kingdom leaves the EU, particularly if the government seeks to make UK businesses more competitive. After all, other schemes in the world, such as Canada’s, are considerably more generous.
As PWC report, the past 17 years illustrate a strong interest on the part of the UK government to promote research and development by supporting tax reliefs. This has been consistent and enduring. It would seem unlikely that Brexit would lead to the dropping of tax relief, given the benefits this has been shown to have in stimulating innovation in the UK economy. While nothing is certain at this point, and nothing is likely to be for several months to come, businesses should consider the evidence of how the UK government has behaved in the past in supporting R&D, as this would seem to be the most likely predictor of the future, post-Brexit situation.
What businesses qualify for R&D funding?
Companies often think that they have to be working in Silicon Valley or some other high tech sort of business to be claiming R&D tax relief, but that simply isn’t true. UK government figures released in 2016 suggest that those claiming tax relief come from a variety of different sectors. By far the largest number of claims are put in by manufacturing companies, information and communication companies, and professional, scientific and technical companies. However, claims have been submitted from a wide range of companies working in other sectors including in the real estate industry, in education, in construction, in agriculture, and in the food industry. The important thing to remember is that R&D, under the HMRC classification is explained as follows:
“R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D.”
You could be creating new IT systems or functionality that is innovative, or you could be making new recipes for your company to develop new products. You might be developing new manufacturing processes to develop products more efficiently or working on virtual reality advances. All of these types of activities may be considered R&D by HMRC, and if you are not sure if you qualify it may be worth asking a specialist R&D Tax Relief Advisor for help. Ultimately, the diversity of companies that qualify for R&D tax relief is large, and it is definitely worthwhile considering if you are conducting in research and development in your business.
The UK government, through HMRC offers R&D funding through an R&D tax relief and tax credit scheme. This enables businesses to gain money off taxes based on funds spent on R&D purposes. The scheme is fairly generous and offers a wide range of companies an opportunity to pay lower taxes based on the R&D that they do. One problem with the scheme however, is that not all businesses realize that they qualify for this R&D funding. This leads to them not claiming money they could that could help them considerably in becoming more competitive. Here we explain what businesses qualify for R&D funding of this nature.
There are two types of schemes for differently sized businesses that allow organizations to gain R&D funding in the form of tax relief or credits. There is an SME scheme and the RDEC scheme (the latter was formerly known as the “large company scheme”). To qualify for the SME scheme the company needs to meet certain requirements in terms of size and income. Specifically, the company should have fewer than 500 employees, and it must have either an annual turnover that is less than €100 million, or a balance sheet that is under €86 million. Companies that do not fit these criteria can claim under the RDEC scheme, but this is significantly less generous (though still worth pursuing!).
How to avoid delays in R&D claim processing
When claiming for R&D tax relief it is helpful to understand the claim processing timescales and to know what to expect in terms of getting any refunds or tax credit due. HMRC has a policy of dealing with small and medium-sized companies’ R&D repayable tax claims within 28 days. In 95% of cases, HMRC does usually achieve this time scale. Some claimants have found that claims take longer than this, however. Here we explain why this can be the case.
One situation that can lead to a delay in tax credits being paid is HMRC is not comfortable with the claim. In the case that a claim is considered to be possibly incorrect then it will seek more information by opening an enquiry. In the majority of cases, this will be done within 30 days of HMRC’s receipt of the claim.
To avoid the likelihood of a delay in the claim process as a result of an enquiry it is best to make sure that HMRC has all of the information it needs to make a decision in the first place. Primarily, this includes a summary of the costs borne in carrying out the R&D (making sure that only allowable costs are claimed for) and an explanation of a number of your R&D projects explaining why they were considered R&D, utilizing the HMRC definitions and guidance. While HMRC does not mandate the sending of these two pieces of information currently, not sending them could delay the claim or arouse suspicion in certain cases. Sending them helps show evidence of a robust and well thought out claim that meets the HMRC requirements.
A common mistake that leads to delays in processing of R&D tax relief is that of not providing bank details. When bank details for the account that HMRC is to pay any tax credit or refunds into is not provided, this naturally leads to a delay, as HMRC do not know what to do with the money. This may seem like a silly problem but it happens far more often than you might think. If you do your own business taxes, make sure you send the details in to HMRC, and if your accountant does them, make sure he/she knows where you want any refunds sent. The good news is that this sort of delay is easily remedied by providing the right information in the first place.
Using a reputable R&D Tax Relief Advisor also has the potential to speed up a claim processing time. While no figures are available on this, it stands to reason that if HMRC has had a good experience with an Advisor over a long period of time, and if that Advisor’s claims are always reliable and stand up to scrutiny, then they are less likely to lead to problems and delays. This may be a step worth considering, especially for companies that are new to the R&D Tax Relief claiming process.At the same time, this will be extremely helpful if you are considering accessing SR&ED finance.