At RandDTax (A.K.A. Terry Toms and Partners Ltd) we are celebrating our fifth birthday. R&D tax credits are now better known about than they were five years ago, but what’s changed in those five years? From the perspective of an R&D tax credit consultant I review the changes.
Half way through writing this I realised there is a lot to write and about and a lot to celebrate so I’ve split it into two parts:
Part 1 - What’s changed in the past five years?
Part 2 - How has RandDTax performed?
There are two R&D tax credit schemes:
Small and Medium Enterprise (SME) R&D tax credits; and
RDEC (Research and Development Expenditure Credits) for large companies with over 500 employees
Both are run by the UK government to provide innovative UK registered limited companies with more money to invest in R&D projects. For profitable companies this is done by reducing their corporation tax payments and for loss making companies there is an option to receive a cash payment.
What’s changed over the past five years?
One of the biggest positives is that several times HMRC has increased the claim rates for SME R&D tax credits, so that now the value of making a R&D tax credit claim is the highest it has ever been.
In 2012 a company making a claim for its past accounting year ended 31st March 2012, if profitable, could get a tax reduction worth 20% of its qualifying R&D costs (20p for every pound spent); or if loss making up to 25% of its qualifying R&D costs (up to 25p for every pound spent).
In 2017 a company making a claim for its past accounting year ended 31st March 2017, if profitable, could get a tax reduction worth 26% of its qualifying R&D costs (26p for every pound spent); or if loss making up to 33.35% of its qualifying R&D costs (up to 33.35p for every pound spent).
These changes are set out in the chart below which also shows the increase in claim values over the past five years.
Chart showing how much the value of the SME R&D tax credit has increased in the past five years
HMRC – making R&D easier?
Over the last two years HMRC has undertaken a review of the R&D schemes which included publishing Research and development tax relief: Making R&D easier for small companies
. It is expected that this review will result in publication of a template for R&D claims. They have said in consultations that they would like to improve the standard of information provided to support R&D tax credit claims. This includes for SME claims, project descriptions and cost breakdowns for all projects if there are less than ten and for ten projects if there are more than ten in the relevant claim period (normally an accounting year). As an experienced R&D tax credit consultant, my view is that requiring SMEs to write about and cost ten projects is quite a big ask as it uses up precious resources that most SMEs cannot easily spare.
Research and Development tax relief: Advance Assurance
In November 2016 HMRC introduced Advanced Assurance
– the aim being to help new claimants and early stage companies get assurance that their R&D activities and costs will qualify before they undertake the work. The thinking being that this would help them raise other funding for R&D. The main issues is that getting assurance involved a more rigorous engagement process with HMRC than making retrospective R&D claims. https://www.gov.uk/guidance/research-and-development-tax-relief-advance-...
The Research and Development Expenditure Credit for large companies
The Large Company R&D tax credit was replaced by the RDEC (Research and Development Expenditure Credit), introduced for expenditure incurred on or after 1 April 2013. RDEC remained optional until April 2016 so companies could choose which scheme to use, but since then has replaced the old Large Company R&D tax credit. It has introduced an element of complexity as it works in a completely different way to the old Large Company scheme and the SME R&D tax credit. The main difference is that the RDEC is an ‘above the line, credit. At current rates a company can add 11% of their qualifying R&D costs to their profits and once a number of calculation steps have been completed, they will receive either a reduced tax bill or a cash payment worth around 8.8% of their qualifying costs. Prior to 1 April 2015 the tax credit rate was 10%, so like the SME scheme the RDEC has been recently improved.
How much are companies getting?
The good news is that the number of SME companies making R&D claims has been rising year on year. In November 2016 we reported that SMEs shared a total pay-out value of over £1b in the financial year 2014-15 – read more here
What does the future hold?
None of us have a crystal ball so it’s hard to see how all the uncertainties of Brexit will be resolved and what that will mean for innovation in the UK, but I think most R&D tax credit consultants would agree that continued investment by government in R&D is critical to our success as a nation. I hope and anticipate that this will mean that the UK government will continue to support the R&D tax credit schemes as a critical plank in providing an environment where companies feel that investing in innovation is a risk worth taking.