Small and medium sized companies (SMEs) claiming Research and Development (R&D) tax relief in 2013/2014 rose by 19% to over 15,000 cases with total government support topping £800m. This is an encouraging improvement, but it is widely acknowledged that the relief is still under claimed.
Reasons offered for this are that the relief is over complex and difficult to understand leading to uncertainty and a lack of awareness amongst potential claimants.
Many taxpayers are currently missing out on an extremely valuable relief that works by lowering the amount of corporation tax that eligible SMEs pay. The relief allows a deduction of 230% of qualifying R&D expenditure in the corporation tax computation leading to a reduced corporation tax liability, or for loss making companies a repayable tax credit if preferred. The availability of the relief can have a significant positive impact on cash flow and any measures to simplify the relief and assist small businesses are welcomed.
The proposed measures to be introduced aim to combat the problems highlighted below:
Lack of awareness – HMRC will explore ways to improve its communication around R&D tax relief, including looking at ways to use data and work with other government agencies to identify companies that have carried out R&D but have not claimed relief. They will also introduce an Advanced Assurance service from November this year for first time claimant companies with a turnover of less than £2m and less than 50 employees. The scheme is designed to provide certainty of the R&D status of the company’s activity and provide a framework with enhanced guidance to allow eligible small companies to progress a claim. If a company is successful under the Advanced Assurance scheme HMRC will accept claims for the first three years without enquiry. General marketing initiatives will also be introduced to increase awareness of the new scheme and the relief in general.
Design and understanding of the rules – HMRC have acknowledged the complexity and lack of guidance around certain areas of the relief. These include definitions of subcontracted R&D, the rules in relation to software development, and the application of the relief as it applies to situations where “science and technology are used to duplicate the effect of an existing process in a new or appreciably improved way.” Further guidance will be issued to aid understanding in these areas.
Administration – HMRC will introduce new digital solutions to automate parts of processing repayment claims to improve the speed, consistency and accuracy of HMRC’s treatment of new claims.
It is certainly true that the relief can be daunting for new claimants. Hopefully these new measures will go some way to addressing the current problems and enable more businesses to secure this valuable tax relief without the fear of getting it wrong.
If your company undertakes work that is technically challenging in nature and is involved in improving products, developing new products, refining processes, overcoming technical problems etc, then you may be undertaking eligible R&D work. Please feel free to call us and we can assist you in determining whether you may be eligible for the relief.
Please speak to your usual contact at Streets or call Chris Connor on 01522 551219.