There is a lot said and written about research and development tax claims, or R&D tax claims to give their shorter title. You would be forgiven for thinking that these were mystical creatures that nobody really understood. As with many things in life, a little information can be a dangerous thing. Picking up snippets of data about R&D tax credits and what they might mean for your business from varied sources can leave you thinking that R&D tax credits are something that are not worth the effort for your business.
In most cases, you couldn’t be further from the truth. For many UK businesses, this is a way to secure much-needed capital and drive their company to the next level. That is why it is essential to understand this government incentive for your business. That’s why we have put this guide together.
From the outside, this looks like a complicated process. Assessing, completing and submitting a successful R&D tax claim can seem like it will take a tax qualification to achieve. But it doesn’t have to be this way. If you know where to start and then where to take this then you will be able to secure the cash from an R&D tax claim back into your business in as little as 6 weeks – it can happen that quickly. You are in the right place to understand research and development tax credits for your own business. Let Lumo, the experts in the field, walk you through an R&D tax claim from start to finish –
Understand Research and Development
The system isn’t the most straightforward. But it can be understood if you set aside a little time to do the research. The HMRC website will show you exactly what the government and the tax man consider to be research and development in relation to this tax credit. The government is looking to reward business that takes a risk in this area. If you are making changes to your business in order to improve what you do, then there may be a claim sat waiting in your business. This includes –
- Developing a new product or an alteration to an existing product
- Adding new machinery or equipment to an existing process
- Coming up with a new software solution to your business or customer needs
- Having to alter what you do to meet legislation or regulations
There are other reasons too, so if you are not sure whether there might be an R&D tax claim sat in your business, then get in touch. We have a team of professionals that look into this every day of the week. They are waiting at the end of the phone to help you explore this opportunity.
On the HMRC website there will be a lot of information about what they consider to be R&D – and what they consider NOT research and development too! This is regularly updated with their latest understanding, so you can make sure you are submitting a claim on the right grounds. The last thing you want to do is spend the time putting a claim together to find that you don’t have the most up to date information.
Doing your research here is vitally important. There are some set criteria from the HMRC and you want to ensure that you tick all of the boxes. Therefore, our top tip number one with an R&D tax claim from start to finish is to read the HMRC website for the latest information.
Link this to your business
You might read all of the guidance on the tax man’s website and start to understand what they are looking for. Please remember that this is only the first step on the journey. Once you know what the HMRC is looking for you need to consider what this actually means in terms of your business.
As with many government websites, this section tells you a lot of theory and bombards you with the do’s and don’t’s. They don’t have the time or space to give exact instruction for every possible industry. So, they will show outlines and leave you to fill in the blanks. This can be frustrating, so remain patent and make that leap. Your knowledge of your business will help you to work trough this and produce a relevant submission for the HMRC to consider.
For instance, a software company may look at the scientific and technical language attached to research and development by the HMRC and think that they don’t qualify. The government uses the phrase ‘The work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology,’ and this puts a lot of people off. Many business owners think that their work cannot possibly be seen as and advance in science and technology and don’t submit an R&D tax claim. This would be a mistake. We help companies from varied sectors to submit successful claims, including –
- A food and drink company that developed a new product
- A software company that worked on projects for several clients over a year
- A consultant who helps their customers build a better business
- A building company that assesses risk before carrying out their work
And there are many more reasons a quality business might have a potential R&D tax claim on their books. This means that you need to know your stuff. Expect to spend several hours on the HMRC website getting your head around their guidance and applying this to your business. Alternatively speak to us and we will take care of things for you.
Our top tip number two with an R&D tax claim from start to finish is to ensure you understand how R&D tax credits might be claimed by your business.
Gather all the financial information
The tax man wants to know how all of this fits into the money you have spent. As you might have guessed by the name of the scheme, this is all linked to the tax you have paid as a business. It can be claimed by loss-making businesses too, so get all of your figures in order to make sure you are in the right place with it.
You will need to know all of the areas that your business has spent money that are related to research and development activities. To maximise a claim, you want to get all of these figures completed on the form. Miss something out and you don’t have this element of your business considered in the claim – it can cost you a large sum of money if you don’t understand what costs to include. There are several areas that you should include –
Salary is often the largest cost in any R&D tax claim. We spend a lot of money on the team of people working for us. This is a significant cost to most companies. The salary for the staff working on the R&D element of a business will be the first entry on the form. You should have details of who in your business has worked on research and development projects and what proportion of their time. If you don’t have these details to hand, then you can estimate this figure based on the percentage of your business that is involved in R&D. Of course, the best way to be accurate here is to keep a track as you go. Ask us for more details on how you can make this happen.
Other staff costs are far too often overlooked when submitting an R&D tax claim. Salary is only one of the costs for an employee. You will probably have employers National Insurance costs to factor into the equation. This is an associated staffing cost that will need to be added to the basic salary of your team members in order to get the most from an R&D tax claim. In addition to this, with auto enrolment in full swing, you will have the potential of your pension contributions to add to an R&D tax claim. This means that your cost to employ a staff member is more significant than first thought – certainly more than just their salary.
Contractors are another cost for an R&D project that must be included to maximise a claim. You have certain expertise in your business, but sometimes need external contractors to help with specific elements of a project. This expertise can come at a high price but thankfully it can be included as part of your R&D tax claim. Think about the expertise you have had to buy in from outside and how this was part of your project.
Materials are something that manufacturers and engineers will use during the process of developing something new. There might be prototypes, discarded materials or tests of new resources as part of developing something new or adapting something existing. The materials used as part of the research and development process can be included in an R&D tax claim.
There may be other items that could be included in your R&D tax claim, depending on your specific business and project. We see R&D tax claims in all manner of places and are experts in maximising a claim so get in touch if you want to talk to someone about your project.
Don’t think that only successful projects can be included – if you started a project and it turned out to be unsuccessful then you can still make a claim if you fulfil the criteria.
So, our top tip number three with an R&D tax claim from start to finish is to list ALL of the costs associated with your R&D project to get the most money back from the HMRC.
Complete the explanation
There are two parts to a submission for R&D tax credits with the HMRC. The first is all about the figures. You and your accountant might be able to pull together all of the data needed from the short guidance above in order to have the first form ready. The next step is to explain what you have carried out.
There is a 2nd report needed when you request money back from the tax man in the form of R&D tax credits. You will need to explain what you have done. They are looking for some basic things –
- What advances your project made
- There were uncertainties in the project
- That you tried to overcome uncertainty with the project
- Confirmation that the answer wasn’t already out there in the public domain
Once you understand the answers to these questions, you will be able to complete a report that satisfies the HMRC’s demands for information and puts you in the ideal position to receive the money back into your business as soon as possible.
Think about the language you use here – the tax man might not speak the plainest English themselves, but they don’t want to be blinded by science or industry jargon when they read your report. You should be able to explain what you did in simple terms.
All that a confusing report will achieve is to slow things down. The tax man will either reject your claim or come back and ask more questions. Getting this right first time will save a lot of stress and delay. The last thing you want is for the HMRC to ask a bucketload of questions and start snooping around your business. Keep it simple, include all of the information and you will be on to a winner here.
With this in mind, our top tip number four with an R&D tax claim from start to finish is to make your explanation as clear and straightforward as possible.
Answer any questions quickly
As well as you might have completed the submission to the tax man, there may be the possibility that they have questions to ask of you. This doesn’t mean that they don’t believe you or that you claim is bound to fail. It usually means they just need a bit more information. Completing the submission for R&D tax credits as well as possible the first time around reduces the chance of a call from the tax man, but there is always the chance they want a bit more data. In this instance just answer the questions as openly and honestly as possible.
It can be quite daunting to deal with the HMRC at the best of times. When they are asking a bunch of questions about your business and the tax form you have recently completed, this stress can raise to another level. Don’t get flustered. If you have been honest and open on the form in the first place them just stand your ground and explain the information. The quicker you answer their questions and clear up and confusion, the quicker you get the cash back in your business.
Submitting anything to the HMRC should be backed up with evidence and steeped in fact. Don’t make the process difficult by making assumptions, guestimating figures and filling the forms with jargon. Make it as easy as possible for the tax man to assess tour claim – and then answer any questions with speed and clarity.
This makes our top tip number five with an R&D tax claim from start to finish is to make answering questions from the HMRC a priority task, so you can clear things up as soon as possible.
Wait for the money to arrive in your bank account
Once you have submitted all of the relevant information you are playing the waiting game. The tax man doesn’t have the best reputation in the world for acting quickly but the process of handing money back to people doesn’t take as long as most might expect.
We see R&D tax claims come back to the people we work with in around 4 to 6 weeks. There are, of course, exceptions to this but if you complete the forms correctly then you will see the HMRC act quickly. The average size of an R&D tax claim we recover on behalf of our clients is over £35k, so imagine what you could be doing with this amount of money in your business in as little as 4 weeks!
- You can use it to reward tour team for a successful project.
- You can recruit new team members.
- You can reinvest the money in the business.
- You can take the money out and enjoy it.
Just remember to seek professional advice if you take the money out of the business so you are making the most tax efficient use of it. There are many ways in which you could use a cash injection for your company.
We make this our top tip number six with an R&D tax claim from start to finish – think about what you will do with the money when it arrives, so it can be put to great use.
Speak to your business associates about it
We all speak to other businesses about what we are doing. We have a trusted network of associates that we share ideas and discuss best practice with from similar companies, suppliers, distributors, advisers and friends. Once you have submitted and received an R&D tax claim then you should spread the world far and wide!
There are billions set aside by the UK government to reward businesses like yours. The people in your network will appreciate the fact that you have taken time out to help them on their journey. Letting people know about R&D tax credits will help them with their business. You can even give them a few hints and tips along the way based on your own experience. The first step in the right direction is to share this article with the business associates you have in your network. They will be able to plan their own R&D tax claim based on the details here. You never know, they might buy you a drink as a small thank you for alerting them to this amazing opportunity! Ideas shared can change the world, so think about the people who you know that would benefit from this.
So, our top tip number seven with an R&D tax claim from start to finish – let your network know about how they could be eligible for R&D tax credits – they will thank you forever!
Rinse and repeat!!
Now, you may think that R&D tax credits are a one-off exercise. That isn’t the case at all. Many of our clients make research and development an integral part of their business, because they know that much of it will be supported by this great government incentive. This is the perfect way to get the most from this scheme.
Looking at your business in a different way will produce different results. If you knew that you could make an R&D tax claim every year, then you could invest more money in research and development and see the rewards from this. The two main rewards work hand in hand –
- Money coming back into your business
- Continuous improvement to what you do
So, when you look at it, the government is rewarding you for making your business better. That’s a win-win situation of ever we’ve seen one. There are a thousand things you could spend a cash injection on with your business. Follow this start to finish guide and you could be sitting on a cash injection to your business directly from the tax man. How satisfying would that be?
This brings us to our top tip number eight with an R&D tax claim from start to finish – make research and development, and thus R&D tax credits, an integral part of your business planning.
At Lumo, we know how hard you work for your business. And there are times when it seems like all of this hard work should bring greater reward. Having R&D tax credits as part of your ongoing business strategy will help you to build for the future. The money can come back quickly and make a massive difference to your business. Don’t delay – the clock might be ticking on the last 2 tax years and we can move as quickly as you need.
Get in touch today to see how R&D tax might work for you.