Are businesses in Wales getting the most out of the R&D Tax Credits scheme?
R&D Tax Credits are an initiative that was set up in the year 2000 by the government to encourage innovation in UK business. Since it was unveiled, HMRC have produced annual figures to show how much R&D tax relief has been paid and breaks down its report by region, industry sector and other monitoring factors. For the latest figure released for the year 2016-2017, Wales was in receipt of £70m in R&D Tax Credits, in comparison to only £5m the tax year before. Whilst this is fantastic news for Welsh businesses that are already benefitting, there are sadly still many that are being left behind.
How much money do individual companies actually receive?
The average R&D Tax Credit claim for an SME in Wales is £46,296. Although £50m of Wales’s £70m total went to SMEs, this is still under the UK average amount of £53,876. For larger companies using the RDEC scheme, the average claim is worth £250,000 in Wales compared to £272,881 across the rest of the UK.
So why is there less in the R&D Tax Credit pot for Welsh businesses?
There are a few reasons why companies aren’t applying for the R&D Tax Credits they are entitled to, even though claims have started to rise. Many businesses automatically assume that R&D tax relief doesn’t apply to them, even without checking the rules, simply because they think it’s only for companies involved in science or technology. Although a project must make a scientific or technological advancement, this can take place in any industry sector and the scope is very wide.
Why else might Welsh businesses be missing out?
Unfortunately many companies across Wales simply don’t realise that R&D tax credits exist, whilst others just keep putting it off. Other businesses don’t have the time or inclination to tackle the rather tricky application process, and even many accountants don’t want to get involved either. This is because R&D is quite a complex, niche area of tax law, which accountants often find takes up too much of their time. However, there are specialists like us that will be pleased to help you.
Having said all this, many smaller company owners will seek advice from their accountant regarding how to identify the tax schemes they should be gaining benefit from. Indeed, we often come across businesses that, once we have told them they could well be eligible for an R&D claim, are surprised their accountant didn’t spot the opportunity in the first place. Maybe this is simply because companies see their accountant as a less expensive option or the one-stop shop for all tax advice. Some more clued-up accountancy practices, generally the bigger ones, have either swotted up on R&D tax reliefs or have partnered up with a specialist that will provide that service for them. However there are still loads of smaller accountancy firms that are just not up to speed, whether they know it or not.
Another issue for Welsh businesses is in maximising their claim. Again, even the businesses that do claim for R&D tax relief successfully may not be claiming for all the eligible projects and costs they are entitled to. The upshot is they could miss out on some of their claim because they don’t have the required experience or knowledge to provide an application that’s fully optimised. Again, this is where we come in.
How can I maximise my claim?
To maximise your claim value we would strongly recommend the services of an experienced R&D tax credits advisor. However, in addition to this, there are a few steps your business can take to boost the success of your application.
1. Foster a culture of innovation in your business
A successful R&D Tax Credits claim has a positive impact for companies, and builds a mindset that focusses on product innovation. Once a company has obtained its first credit, the extra funds can go a long way in boosting morale and productivity. This in turn acts as a great incentive towards further R&D activities.
2. Understand your pre-trading expenses when making your first claim
When preparing a claim for R&D Tax Credits, it’s really important that newly-established companies take into account any R&D expenditure that took place before trading started, as these costs are treated as an enhanced trading loss when a first claim is submitted. Once they become a cash credit, your cashflow will likely enjoy a much-needed boost.
3. Optimise your administrative structure
Even if your company structure is not yet formalised, above all else make sure you’re set up as a limited company that pays Corporation Tax.
Longer-term strategies for optimising R&D Tax Credit claims include deciding how to pay company directors that take part in R&D activities. If possible, pay them a salary instead of a dividend, because dividends can’t be claimed as an R&D credit whereas salaries can.
4. Make sure you keep thorough, up-to-date records
This is vital both for first and future R&D Tax Credit claims so start early. The amount spent on consumable materials used in R&D should be recorded carefully on your books, particularly if you are running trials or building prototypes.
If you have an accounting system that allows for it, a good way to do this is to issue an in-house purchase order. You should also keep a record of material wastage, as well as the value of any goods you choose to sell on. Maintain an up-to-date list of all the R&D work that’s taken place each year so that no projects are overlooked, even if they turn out not to qualify.
Where can I turn to for help and advice if I have questions or concerns?
Tax Cloud is part of Myriad Associates, an expert team of experienced R&D accountants and consultants. We will be pleased to answer any questions you may have, deal with any concerns and work with you to facilitate your R&D Tax Credit application to give you the best chance of a hassle-free process, whether you’re based in Wales or anywhere else in the UK.
To discuss anything further, call us on 0207 118 6045 or use our contact page for high quality, professional advice right when you need it.
- Submitting R&D tax claims since 2001
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- Over £100m claimed and counting
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- Member of the Research and Development Consultative (RDCC) committee
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