The rules around R&D tax credits are changing from April 1st, 2023, and will mean claims made after this date will be subject to higher levels of scrutiny. With only weeks until the deadline, Stephen McCallion, founder and CEO at ZLX Business Solutions, explains what action Scottish companies should take to ensure they remain fully compliant with the new legislation.
1. What is an R&D tax credit?
An HMRC scheme designed to support UK businesses that have invested in innovative projects through research and development (R&D). These tax credits incentivise firms across all industry sectors to continuously improve their performance and productivity.
While most companies can apply, you need to be a limited company that is subject to UK corporation tax and have spent money on research and development activities in the relevant qualifying period.
2. Does my business qualify for R&D tax credits?
If your company is developing products, systems, and processes, there is a good chance that you do qualify for an R&D tax credit – potentially releasing vital funds for business growth.
By speaking about “research and development”, it’s understandable that business owners have some reservations about making a claim or may make the wrong assumptions. Often, they don’t realise their company qualifies for R&D tax credits or fail to claim their full entitlement.
It’s common that businesses don’t consider that the work they do involves any research and development activity. HMRC requires you to have spent business funds in developing an innovative product or process that can stand up to scrutiny with regards to the BEIS guidelines, which the project must meet to qualify for a genuine claim.
3. Can I apply for tax credits myself?
Unless you’ve claimed before the process can be daunting and, without specific legal, financial and technical expertise, many businesses will be unsure about where to begin or which projects to include in their application – which is why many businesses continue to significantly underclaim.
Given the amount of funds potentially available to your business, it is prudent to seek independent advice from a trusted professional before making a claim. They will be able to quickly understand and identify those projects eligible for tax relief including investments in new products, services, software and processes which may otherwise be missed.
4. Should I be worried about compliance?
There are risks involved in any claim and it can be a considerable effort to produce a comprehensive qualifying report containing all the necessary supporting evidence that will be acceptable to HMRC.
With the tightening of rules around R&D tax credits and HMRC’s increased focus on compliance, it can be difficult to keep up to date; however, ignorance is not an excuse. It’s worth noting that the company’s directors are personally responsible for the validity of a claim.
In our experience, we regularly encounter submissions where the wrong items have been included or projects have been overclaimed for. HMRC may take the decision to reject a claim and issue a penalty to the company – up to 100% of the original amount – if the claim has been put together in a reckless manner or without due regard to the BEIS guidelines.
Stop and think if you have the resources to defend your claim against a random HMRC check or detailed investigation. While our own review rate is extremely low compared to the HMRC target of 12% of all claims, our team deals with any investigation from start to finish on behalf of our clients while our internal compliance team provides stringent checks before submission.
5. How long does the process take and what does it involve?
On average, it takes up to three months from the first phone call and around three hours of your time to receiving money in your business’ bank account. Naturally, the more complex or lengthy claims will take longer to properly assess.
The scope for identifying R&D activities is huge but, provided you have submitted a comprehensive claim with all technical information available, the process should be seamless.
6. How much can we expect to receive?
The average pay out from HMRC for an SME is around £55,000 per annum, while it’s more than 10 times higher for large corporates. With our help, customers in the food & drink and manufacturing sectors have reclaimed funds from £10,000 to £1.5million through their innovation investments.
If you’re making a claim for the first time, you can typically claim R&D tax relief for your previous two completed accounting periods meaning you could be entitled to a six-figure sum. So long as you meet the qualifying criteria, you can successfully apply year after year.
However, once the financial year-end has passed, you will immediately lose the ability to claim from two years before. Businesses should plan well in advance of their financial year-end to ensure all relevant supporting information is properly collected.
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