U.K. R&D Tax Credits—Fueling Growth?

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Mike Price

Mike Price The MPA Group, U.K.

Mike Price is Director at The MPA Group, U.K.

Innovation is a critical element if an economy is to thrive. The U.K. government's Research and Development Tax Credit Scheme is designed to reward companies that invest in innovation: more companies should take advantage of the scheme.

The U.K. government's Research and Development (“R&D”) Tax Credit Scheme is designed to reward U.K. companies that invest in innovation. HM Revenue and Customs (“HMRC”) has awarded over 16 billion pounds to forward-thinking businesses since 2000—a financial windfall used to support new ventures, investment in new equipment and the employment of more skilled staff; ultimately fueling business growth.

It is a fact that for any economy to thrive, innovation is a critical element. In fact, the European Union itself has stated that in order for an economy to grow, a minimum of three percent of a country's total GDP should be reinvested into research and development ( http://src.bna.com/uqp). So, with concerted efforts being made to stimulate the U.K.’s lackluster productivity levels to drive better competitiveness, it is clear that a commitment to innovation will be essential for a prosperous economy going forward.

The R&D Tax Credit Scheme

The R&D Tax Credit Scheme incentivizes and rewards both large and small companies that are prepared to invest in innovation. This means that an organization incurring costs in developing new and improved products, processes or services can receive a cash payment from HMRC via a tax credit or a tax reduction. In reality, this results in an often significant cash injection back into a business or reduced liability on tax bills: cash that can then be reinvested to support new business ventures, further equipment investment or employ a greater number of skilled staff.

R&D tax credits aim to do this, yet only a small percentage of businesses are currently taking advantage of this scheme. With around 25,000 qualifying companies having made a claim under the scheme, and with estimates of the existence of 750,000 tech-based U.K. companies, it is clear that many have yet to investigate a scheme that can deliver real value back to a business.

What Qualifies?

The simple way to assess whether activities qualify is to examine activities in a business focused on developing new services or products, often to meet a new market or customer need. Efforts to think outside of the ordinary, projects that fail, but with the lessons learnt, go on to succeed through the development of a new product, service or process. The journey to their creation—not the standard steps—are what will entice HMRC to reward pushing the envelope.

Some examples where organizations can demonstrate qualifying activities include the time a company spends on a R&D project, the costs incurred using specialist subcontractors, items that are “consumed or transformed” by the R&D process, and components purchased to construct a prototype, as well as software used as part of the project.

It is vital that all such activities and investments are not missed when compiling an R&D tax credit claim. There is no limit on the amount that can be claimed, and typically organizations can recover up to 33 percent of qualifying costs, even if the company is loss making. In fact, HMRC figures from 2015–16 show that the average claim value under the scheme was 109,500 pounds—a substantial addition to a business's bottom line.

It is safe to say that for a number of companies the ability to obtain a cash injection thanks to tax credits has been a lifeline. Not only has it supported them when financial pressures have been intense, it has also provided the funds to help the company expand and grow.

The Future for R&D Tax Credits

Recent pronouncements indicate that the government remains committed to the scheme, with the 2017 Budget committing an extra 2.3 billion pounds for R&D investment. The latest allocation, which will focus on artificial intelligence, full fiber broadband and 5G mobile networks, indicates the government is determined that the U.K. remains a country where innovation is both recognized and rewarded.

Furthermore, all changes made to the scheme's qualifying criteria, certainly over the last decade, have seen increasingly generous allowances made. Though underused, it remains a well-known if not entirely understood scheme, when compared to the rules and regulations surrounding other currently available grant and loan processes.

Continual and increased promotion of R&D tax credits would be helpful to alert firms not familiar with the scheme. Limited resources at HMRC make this a challenge, but if stakeholders such as financial advisors and accountancy firms increased efforts to better understand the benefits for their clients, then claim levels would certainly rise. It's really about advisors securing knowledge of the scheme to ensure their clients receive all the tax breaks to which they are entitled—including R&D tax credits.

Finance professionals will undoubtedly be aware of the many grants, incentives and loans available for innovating companies. However, the complexities of working in accordance to stringent HMRC guidelines can make producing a compliant claim difficult. However, in the years ahead, with the right specialist support, even more of the country's innovating businesses can also profit.

The R&D Tax Credit Scheme is a prime example of where government can make a difference on the ground. The thousands of organizations which have, to date, seen the benefit of a successful tax credit claim, would certainly agree.

Mike Price is Director at R&D tax credits claims specialist The MPA Group, U.K.The MPA Group is a specialist R&D Tax Credits specialist. It works together with engineers, technologists, manufacturers and developers to make the most of every opportunity available to businesses now and in the future.www.thempagroup.co.uk For further information contact: Nicola Pittaway at McCann PR nicola.pittaway@mccann.com

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