The agencies we speak to often don’t realise that their day-to-day activity is in fact research and development (R&D). “So what?” you may think if you don’t understand R&D either, but falling for these misconceptions could be costing you big money.
You could potentially be missing out on more than £50,000 a year. Companies carrying out R&D can potentially qualify for tax credits from HM Revenue & Customs (HMRC) in the form of a cash repayment or a corporation tax reduction.
With SME’s being able to recoup up to 33p in every £1 spent on development, most of our clients receive more than £50,000 a year. Big business can claim too, albeit at a lower rate. However, the size of their enterprise usually means a significant benefit for them too.
For some agencies, this cash boost will mean they can invest back into their business, hiring new staff and going on to win new accounts. For others it could be the means to bridge the gap between funding rounds.
At ForrestBrown, we work with more than 100 agencies across the UK, and it is surprising how many misconceptions exist. Most of them involve agencies struggling to identify whether they qualify, the full extent of their R&D activities or which of their costs they can reclaim.
Six common R&D tax credit misconceptions
“We’re not solving the World’s problems”
For developers in particular, R&D is their daily bread and butter. But often they simply don’t see what they are doing as making an advance in technology through the resolution of uncertainty.
In our experience, if you are customising software or integrating platforms, there are a number of ways in which these efforts could qualify as R&D. We tend to think of an advance in two ways; the first is, is it new? Have you created a product, process, device or service using new knowledge or capabilities? Or have you extended overall knowledge in the field to gain a competitive advantage?
The second is improvement. Have you made an existing product, process, device or service better? Or, have you duplicated something that already exists in a new way?
Recent projects that we have included in claims on behalf of agency clients include: creating shirt configuration technology; delivering a new route planner site and app and imagining council services online.
“Loss-making companies cannot make a claim”
Wrong. The rate of relief for a loss-making SME is actually more than for a profit-making SME. Loss-making agencies with less than 500 staff and a turnover of less than €100m (roughly £80m at the time of writing) can recoup up to 33.35% of their development costs. So, a loss making agency investing £100,000 in R&D could claim up to £33,350 in savings. Those making a profit can, of course, still claim and receive up to 26% of their expenditure returned – that’s up to 26p for every £1 spent.
“R&D tax credits are only for successful research”
Failing is a natural part of R&D, and HMRC’s R&D tax relief schemes don’t penalise companies for trying. As long you’ve identified the uncertainties and are genuinely trying to overcome them through R&D, you can include unsuccessful projects in your claim.
“Client projects can’t be included”
This is one of the biggest misconceptions we hear at ForrestBrown. In fact, a number of our clients have previously under-claimed by omitting projects they have undertaken for clients. So, that real-time, location-based app you’re creating for a big B2C brand – yes, that can be included as part of your qualifying activity.
“That research was part of a pitch”
Inevitably, pitching for business in the agency world often includes coming to a new business meeting with your ideas already developed. Your client wants to compare your creative and technical abilities to those of your competitors. You win some, you lose some – but importantly, the time your staff spent on creating your proof of concept can qualify.
“Employer pension contributions do not qualify for R&D tax credits”
Finally, as well as wages, you can also include employer national insurance and pension contributions. A percentage of your subcontractor costs can also be factored in. Consumables also qualify, as well as expenditure on software. We often find that our clients have previously been under claiming and missing out; for example, we recently optimised a new clients’ claim, boosting their benefit 14-fold to more than £200,000.
Making innovation pay
We started working with Simpleweb, a SaaS and mobile products agency, in 2015. They had previously used a Big Four accountant to claim R&D tax credits. We increased their claim by 57% on their previous one by identifying more qualifying costs – 21% of their total expenditure on R&D. Since then, they’ve transformed the way their developers work; consideration to R&D is given at the outset of new projects, and time is spent each week generating ideas for innovation.
Lisa Marie-Smith is director at ForrestBrown.