Research and development tax relief
The business world has long talked about the benefits of an enterprise economy, where innovation, and research and development (R&D) are at the core of corporate strategy. However, evidence suggests that in the UK, businesses are not taking full advantage of the mechanisms already in place to encourage the R&D activity that such an economy thrives upon.
R&D tax reliefs were established to help drive innovation in the UK. They offer companies that carry out R&D activities the opportunity to reduce their tax bill.
The type of activity that qualifies for R&D tax relief is wide-ranging and sometimes challenging to apply in practice.
HM Revenue & Customs (HMRC) is now seeking to ensure that the definition of R&D is applied more rigorously particularly in relation to non-qualifying production activities. This can be a difficult area for companies to determine whether or not their activities qualify and careful consideration is required to the type and purpose of activities undertaken. We have extensive experience in advising companies and liaising with HMRC on these types of issues.
If a company is doing one of the following, they may be carrying out R&D:
- Investing its scarce resources to keep ahead of its competition?
- Doing something that is innovative and unique?
- Working on solving a problem that has never been solved before?
Time is running out for many companies to make claims. Until March 2008, companies had six years in which to make a claim, this is now reduced to only two years. This means that the deadline is fast approaching for many companies to make claims for 2007.
The Government has made a number of changes to the R&D tax regime since its introduction in 2000. As a result, awareness of the potential range of application of incentives is limited and companies are struggling to grasp the increasing numbers of opportunities available to them.
According to our research, average take-up levels are low. About *33% of small-to-medium-sized enterprises for whom R&D tax credits are relevant did not claim them largely because the application process is perceived to be complex.
R&D costs that are eligible for the incentive fall into four main categories:
- Staffing costs
- Consumable and transformable materials
- Externally provided workers
- Payments to qualifying bodies/contributions to independent R&D efforts
Companies should aim to develop a clear, effective methodology to support and record its R&D projects in order to make claims efficiently and maximise their effectiveness. To ensure a successful claim, a company should support its application with satisfactory documentation, enabling HMRC to verify that its rules are being adhered to.
At PricewaterhouseCoopers, our team of specialists are experienced in maximising companies' R&D claims, and we have assisted some companies to increase their R&D claims by as much as 400%. We have extensive experience in developing practical claim processes that are robust, unobtrusive, easily repeatable and in line with HMRC requirements.
*PricewaterhouseCoopers survey, June 2006
