R&D tax credits which companies are benefiting by Linda Eziquiel
by Heather Dandridge yesterday at 12:36
R&D tax credits – which companies are benefiting? by Linda Eziquiel
R&D tax credits are still too little understood. If you are a company director or their accountant – could you or your clients' be paying a high price due to lack of understanding?
Many small businesses have discovered that Research and Development (R&D) tax credits can provide a significant source of revenue but many more businesses can benefit than realise it. Some are put off because they think the claims process will be difficult. But compared to securing other sources of funding such as grants or bank loans, making R&D claims is usually a relatively speedy and painless process. It's ideal for small businesses that need an injection of cash.
What indicates you could have a valid R&D claim?
Ask yourself the questions:
Has the company recently developed or improved a product, process, material, device or service, where the development process involved the application of science or technology?
The development could be to create:
a new software program or technology system, or
a new manufacturing process e.g. for a lathed part, or
the creation of new items (e.g. cosmetics range, raw plastics formulas for industry, ice cream recipes and associated mass manufacturing processes),
a new gadget (e.g. new audio equipment, new laser treatment unit etc. etc.).
Did the process involve overcoming some technical uncertainties relating to how to get the result you wanted or which development option to choose?
If the answer is "yes" to you could be eligible to claim R&D tax credits based on the costs of the development.
The Government's R&D tax credits scheme was established in April 2000 to reward innovative companies that are investing in or using technology to develop or significantly improve products, processes, materials, devices or services. They work whether the claimant company is profitable or not and you can go back two years based on the company's accounting year end. A claim for the two past years can provide a significant "windfall" injection of cash.
So how much can you claim?
The value of a claim can run into many thousands or even hundreds of thousands of pounds. It will be worth up to 33 per cent of your "qualifying costs". Qualifying costs include money spent on staff salaries for staff undertaking the R&D and a portion of sub-contracted activities. Subcontractors, such as software developers or engineers, can be based in the UK or abroad. You can also claim materials consumed and wasted as part of the R&D project, so things like prototype tooling or electronic circuit board needed to build a prototype are usually claimable R&D costs.
Examples of R&D
Below are five examples of different types of companies that have benefited.
Morgan's Pomade is one of the oldest independent creators of beauty products in England, founded in the 19th century. From their manufacturing facility in Kent they have develop a wide range of hair and beauty care products with emphasis on good quality and natural ingredients.
William Pearson, MD, Morgan's Pomade said: "We'd heard of R&D Tax Credits but hadn't done anything about it as we thought the application process would be much too time consuming, and then we met up with Linda Eziquiel."
That was in 2012 and since then they have claimed R&D tax credits year on year. The benefits secured to date have typically been worth between 11% and 25% of their investment in R&D activities.
Constructing Better Heath are one of the more unusual companies claiming R&D tax credits as they are a Company that is Limited by Guarantee and therefore they don't distribute dividends to shareholders. Nevertheless, as they are subject to corporation tax on any profits they make they are still eligible to claim R&D tax credits.
CBH have invested in developing a pioneering web based portal to improve the health of the construction industry workforce. Their R&D, which has so far spanned five years, has included creation of an online knowledge portal, including centralised databases and data management software used by individuals, employers and health professionals in the construction industry.
Constructing Better Heath's CEO wrote "I am writing to thank you for all your hard work and support in the successful claim against R&D expenditure. This is of significant financial consequence to CBH and will ensure our cash flow for some considerable time."
The amount of their benefits has varied each year - in the most recent claim year it was worth around 18% of their qualifying R&D costs.
South East England food manufacturer
A well-established food manufacturer set out to develop its range of ice cream recipes to include ice creams made with all natural ingredients. They worked out that researching which alternative ingredients were suitable, developing and testing a range of new recipes and running manufacturing trials for a selected number of the new recipes, amounted to in excess of £500,000 in qualifying R&D costs. Assisted by Linda Eziquiel from RandDTax they have so far made R&D claims over a three year period which have resulted in a reduction in corporation tax payable worth 25% of their qualifying R&D costs. Thus their post-tax cash benefit was worth in excess of £125,000.
Essex based precision engineer
A long established family run precision engineering company based in Essex wanted to investigate whether they could claim R&D tax credits. They knew of other similar manufacturers that had made successful claims. They sought the assistance of Linda Eziquiel, a specialist R&D consultant from RandDTax.
They explained that they are constantly involved in developing new manufacturing processes for their customers. On the more complex jobs there are some technical challenges that need to be resolved to meet required production quality, cost targets and cycle times to manufacture a part successfully in volume.
Over the past four years they have made successive claims against the costs of developing new manufacturing processes for the more complex precision engineered parts they produce for their customers. Their qualifying R&D costs amount to around 10% of their total expenditure each year. As a result of their R&D claims they have reduced their tax bill to zero in three of the four years and on top of that were able to claim a tax credit cash payment in each of those three years.