Unlocking innovation budgets: How to tap into R&D tax incentives before it's too late
Research and development (R&D) is just as prominent in the world of agencies as it is in any scientist’s lab or engineer’s workshop. Take up of government support to maintain this fast R&D pace is on the up, but there’s still a long way to go. And while agencies with a 31 March year-end need to hurry to meet their R&D tax credit deadline, they could see a quick benefit if they do.
Claim your R&D tax incentives before the end of March or miss out
As I adjust to relative normality after a mind-blowing few days at SXSW, I’ve reflected on just how much the creative and digital sector relies on unfettered innovation. Virtual reality (VR), augmented reality (AR), artificial intelligence (AI); these technologies were once science fiction but now they’re part of our everyday lives because of the work of this industry. And whether agencies are developing their own products, processes and services or finding unique homes for existing ones, they’re entering uncharted territory.
R&D tax credits exist to reward companies that make that giant leap into the unknown. Agencies carrying out R&D can potentially qualify for tax credits from HM Revenue & Customs (HMRC) in the form of a cash repayment and/or a corporation tax reduction. That’s cash that could spark the next big project, or fund the final push in creating something remarkable.
I’ve seen a lot more awareness of R&D tax credits among agencies in the past year, which is fantastic for the industry, but many are still not maximising the opportunity. ForrestBrown recently published a report, Igniting Innovation, which found that start-ups and smaller companies aren’t benefiting from eligible tax relief to the extent larger businesses are. So what are the reasons many agencies are still missing out, and how can they approach the process to get maximum value from it?
Issues tend to stem from two main areas – companies thinking their work isn’t eligible, and companies that don’t get their claim right:
Part of the R&D tax credit process requires companies to provide a description of their R&D activity. This is a great opportunity to look beyond the numbers and explain just how innovative key projects have been. However, many agencies restrict the qualifying costs they include in their claim to just the few written examples they’ve given, and not to their entire spend, meaning they miss out. Use words to tell your story and bring it to life, but make sure to include everything in the claim, or you won’t maximise its potential.
Assumptions are often made by agencies that qualifying R&D costs only include the time spent by technical staff working on relevant projects. But the impact of R&D activity on the wider business is often far greater – involving the coming together of project management and finance functions, and so on. Look at the full picture of qualifying costs and if you’re not sure, seek specialist advice – it could make all the difference.
Integration of systems
I’ve already made reference to VR, AR and AI, and these are good examples of existing technologies that can be integrated with something else to create a new product, process or service. But I often speak to agencies who have assumed that using an existing system as the foundation of their R&D means what they are doing doesn’t qualify. Integrating two systems, even if one or both are ‘off the shelf’, still requires unique technical challenges to be addressed, which defines the activity as R&D. It doesn’t have to be as revolutionary as VR for example, but as long as you are resolving technological uncertainties, it could count.
With staffing costs often forming a large portion of an R&D tax credit claim, HMRC wants to see good record keeping. Many employers do keep excellent records of payroll costs and agencies will keep a general record of time spent against client projects. What they tend not to do nearly so well, is record how employee time is allocated to specific tasks. Systems can easily be set up to track this, and also to boost staff compliance. One client of ours has gone even further to put a lock on their beer fridges so that they would only open once all staff timesheets have been completed each Friday.
R&D relief is designed to incentivise innovation, and the government has further backed the creative industries in its latest Industrial Strategy – seeing it as crucial to the UK’s economic prosperity. The scheme is not going away, and may be further simplified following announcements made in the Spring Budget.
If your tax year ends on 31 March, there is even more impetus to look at the opportunity now, as you will be able to include all R&D activity undertaken within the past two years if you submit a claim before the end of the month. I’ve seen the R&D tax incentive make the difference between success and failure for some businesses, so explore the opportunity now.
Lisa-Marie Smith is a director at R&D tax credit consultancy ForrestBrown, and regularly speaks at industry events to raise awareness for R&D tax incentives and the exciting innovative work they can help to fund.