One of the most critical aspects of business is determining what makes your product or service unique. This unique factor could be your team’s skill, experience, knowledge, or even your locality for certain businesses.
Outside of business services, however, many businesses define their competitive edge by discovering new challenges to address or devising innovative ways to address them. So, it’s those forward-thinking entrepreneurs we’d want to introduce to Research and Development (‘R&D’) incentives.
WHAT EXACTLY ARE R&D TAX INCENTIVES?
Since 2000, the government of the United Kingdom has provided R&D incentives to firms that study and create innovative goods. The R&D tax regime is extremely generous and helps to boost job creation whilst also strengthening the United Kingdom as a worldwide economic leader.
One of the major challenges the R&D tax regime has is that businesses either do not believe it applies to them or do not comprehend how it may help.
“BUT ISN’T THE R&D CREDIT ONLY AVAILABLE TO LARGE COMPANIES LIKE AMAZON?” NO.
The R&D tax incentive has been simple for early-stage firms to overlook for the majority of their existence, which is reasonable. When you’re not profiting and losing money, you’re less inclined to spend a lot of effort looking for strategies to decrease your corporation tax liability.
A company that spends £100,000 on R&D can generate up to £33,000 in R&D tax credits. If you have investors behind you, they are presumably aware of the R&D credit and will want you to make use of it.
In our R&D tax credit case studies, you can see three instances of our R&D tax credit claims and the benefits these companies have received.
R&D TAX CREDIT EXAMPLES
In principle, R&D tax credits are straightforward. The UK government recognises your company’s innovation efforts by providing relief in respect of eligible R&D expenses incurred. Not so quickly.
In order to be eligible for relief, your activities must conform to the government’s definition of R&D.
Your company must:
- seek to achieve an advance in science or technology
- broaden the entire scientific or technical knowledge or competence in your industry sector by including an ambiguity that competent professionals can’t readily deduce and doesn’t have a universal solution
- entailing a doubt that competent professionals cannot simply settle and for which there is no standard solution
The government will reward only genuine and serious business-related R&D efforts. This is why the defining rules have been left stringent yet ambiguous. Many inexperienced individuals struggle to grasp whether research and development activities fit these criteria.
Taking a look at some real-life case studies may help you get a better understanding of what HMRC are looking for. Here are some examples of R&D tax credits from some of our clients.
Each one works in a different field. They each seek innovation in their own unique way and have overcome various technological challenges.
CASE STUDY: SOCIAL FINTECH
BEAM
Beam is the epitome of social innovation. This organisation raises funds for homeless people through crowdsourcing and assists them in obtaining secure homes and solid jobs. It boosts efforts through social media and relies on third-party partners to establish trustworthiness.
Beam’s societal advancement is made possible by its cutting-edge technical engineering and R&D. Despite Beam’s objective being centred on social innovation; its social activity is ineligible for R&D assistance.
REGARDLESS OF SOCIAL MERIT
Beam can only earn tax incentives for the technological advancements that fuel it.
Assembling effective R&D credit claims begins by moving the emphasis away from merit, social impact, and charity contributions. R&D tax incentives aren’t based on societal or even human worth.
HMRC solely recognises scientific discoveries as the driving force behind any societal improvement.
ONLY TECHNOLOGICAL ADVANCEMENTS
Beam faced several technological concerns when establishing its social organisation. They had to combine FinTech, security checks, social networking, and gamification and overcome several technological challenges.
The software platform is entirely open and keeps up-to-date statistics on its development. Beam had to create its own model from scratch because there was no precedent to follow. Its platform has increased non-profit organisations’ financial capabilities.
IDENTIFYING THE TRUE MOTIVATOR
We tend to attribute societal advancement to improved ideas or ways of thinking. However, new technology improvements are frequently hidden by societal leaps.
Analysing these regions frequently reveals previously overlooked scientific discoveries.
For example, advancements that increase corporate efficiency boost the bottom line. This surplus can subsequently be distributed to workers in the form of benefits.
Your undiscovered technological advancements may qualify for R&D tax credits.
CASE STUDY: QUALIFIED START-UP OPERATIONS
DYNAMO
This internet start-up was developed to make premium social events more accessible to the general public through crowdsourcing. It’s a social engagement platform that connects people with leading event promoters worldwide.
This firm is primarily concerned with speedy user acquisition and giving a fantastic experience to its users. Not in terms of propelling the rest of the industry ahead.
However, like any effective social network, Dynamo relies on ongoing, rapid development to build its foundation.
DEVELOPMENTAL EXPERIMENTS
Dynamo is an excellent case study since its aim is not technological in nature. It isn’t enticing new clients by displaying its innovative new code or the most recent release.
Dynamo’s R&D activity is internal, covert, and purely to enable its expansion. Because the breakthroughs in research and development are dispersed throughout its infrastructure, things become a bit messy.
Companies that perform work that requires several progressive iterations, corrections, and modifications may find it challenging to identify these operations and assess their expenses.
IDENTIFYING INTERNAL VALUE
All start-ups are basically focused on research and development. However, businesses cannot submit the complete cost of operating as part of an R&D incentives claim.
All R&D activity must still be broken down into the technological development of particular activities and their related expenditures. R&D is defined as resolving unsolved difficulties or constraints in technological infrastructure. Staffing and software licence costs can be included.
EXPERIMENTING
The UK government is unconcerned with the commercial value provided by R&D; however, it is exclusively concerned with hard scientific development.
Start-ups are not required to verify their work based on its business effect. To qualify for R&D tax credits, you only need to demonstrate technological progress.
WHAT ARE YOUR PERSONALISED ENHANCEMENTS?
Many businesses use bespoke programming to go around software limits or to remedy system concerns. It is worth investigating if any outsourced innovation is eligible for R&D tax credits.
CASE STUDY: IMPROVING AN INDUSTRY’S TECHNOLOGICAL CAPABILITIES
AVVOKA
Avvoka is a foresighted law firm. They employ cutting-edge technologies to provide a core range of legal services on a large scale. Avvoka uses AI, automation, data science, and no-code technologies in record-keeping, contracts, and cooperative negotiation.
They’ve fundamentally revolutionised the legal sector by offering new technological capabilities. Avvoka has never functioned as a regular law practice. It has always been technologically advanced and inventive. Avvoka is built on research and development.
EXPERIMENTAL DEVELOPMENT AND APPLIED RESEARCH
Avvoka does a lot of research and development. The majority of which is categorised as applied research and experimental development.
RECOGNITION IS NOT ENSURED
Avvoka is clearly a forward-thinking firm. The company appears to be a wonderful illustration of what the government want. They’ve advanced in their profession, are extremely productive, and are still growing.
Despite this, Avvoka continued to be denied R&D incentives.
The government will not go out of its way to approve all R&D incentive claims. R&D efforts must be precisely arranged and submitted in distinct claims in order to collate all applicable support.
APPLICATIONS THAT ARE LEGAL
The government is always looking for confirmation that your R&D operations were legal. This entails explaining why R&D is required.
Despite the fact that Avvoka is founded on invention, they needed to separate their technological achievements into different R&D initiatives, each with a solid goal and clear objective.
When they did, Avvoka’s claims went through without a hitch. They have received all of the relief that was claimed.
YOUR APPLIED STUDY
To qualify for R&D tax credits, you do not need to develop new technologies or create your own AI models. Adoption of cutting-edge technology, methods, or procedures is sufficient to qualify.
Has your company:
- Ironed out flaws in a manufacturing process?
- Have you tried or analysed a new way to enhance output?
- Have you hired external experts to help you overcome technological challenges in respect of your operations?
These are examples of common company operations that might qualify for R&D tax credits.
“Research is looking at what everyone else has seen and thinking about what nobody else has pondered.” Albert Szent-Gyorgyi
While too cautious individuals may assert that only “science-class” firms are eligible for the R&D tax credit, those comments are based only on pessimism and perhaps a little misinformation.
The UK R&D credit has four fundamental conditions, and “cutting edge” is not one of them, nor has it ever been.
To summarise, you do not have to be a physicist, chemist, biologist, or anything else that ends in “ist” to qualify for the R&D tax credit. However, there are a few conditions your company must follow in terms of what sorts of research qualify for the incentive and which costs you may claim.
IS MY COMPANY RESEARCH ELIGIBLE FOR THE R&D TAX CREDIT?
In order to qualify for a tax credit, your study must be improving science or technology (not just for your company but within the industry), entail some mystery (you cannot know the solution), and depend on scientific or technological concepts.
CAN I DEDUCT MY RESEARCH EXPENDITURES FROM MY R&D TAX CREDIT?
Employee staff costs, specialist third parties, materials and utility costs, are the four major forms of research-related expenses that can be claimed.
As previously stated, the ability to claim labour performed by team members or outside teams has always boosted the employment market.
The R&D credit cannot be used for the following categories of research:
- Social sciences, arts, and humanities
- Surveys and studies
- Market research and post-production
- Adaptation of a company’s own knowledge to bring it up to speed with the market
- Adaptations required for aesthetic purposes
WHERE TO BEGIN WHEN CLAIMING THE R&D TAX CREDIT
The fundamental difficulty with the R&D credit isn’t obtaining the credit; it’s justifying the amount asserted with correct and sufficient proof. Most taxpayers do not feel their activities meet the criteria and they expect that the claim process will be onerous and hence we still come across companies that are eligible to claim but they are simply missing out.
HOW CAN COOPER PARRY HELP?
Cooper Parry is comprised of technological professionals, tax experts, industry-leading accountants, and all-around innovators. The specialist R&D team was founded in 2017 by our Head of Department, Chris Knott. Having worked with the R&D tax regimes since their inception in 2000, Chris is well versed in all aspects of the R&D process.
