R&D Tax Relief – Are You Claiming?

Economic growth is key to the recovery in the UK. The coalition Government is clearly placing their faith in UK businesses to drive that growth, a cornerstone of which is the investment and development of world leading design and technologies to give the UK a competitive advantage in the global economy.

Key to this policy is the generous R&D Tax Credit scheme; however, it is surprising that relatively few businesses in the investment management sector have sought to make claims despite many hiring scientists, mathematicians and technology experts.

The tax relief operates by encouraging companies to invest in R&D activities by providing additional relief on qualifying R&D costs. Relief is available to all businesses both large and small, but it is the relief afforded to small and medium sized enterprises (SMEs) that offers the largest savings. Currently a tax deduction of up to 225% may be claimed, however many companies that may be entitled to the relief are not claiming this deduction. The main reason for this seems to be that R&D instantly conjures up, for many, images of men in white coats performing extensive scientific research. However, this is not the case and many projects could qualify as R&D. As you may expect, the pharmaceuticals and biotech industries are the top two claiming industries, however it may be a surprise to some that banking and financial services are in the top five claiming industries.

For some this could be a major relief, especially hedge fund managers, many of whom develop their own bespoke trading systems and technologies. Although there are no definitive rules for what qualifies for the relief the key criteria for any project is that it must seek to achieve “an advance in science or technology” through the resolution of “scientific or technological uncertainty.” For any development project that a business embarks upon where there is an element of uncertainty there is a possibility the work may be eligible for R&D.

Technological uncertainty is an interesting concept and is where most managers may qualify. Where managers are trying to combine different technologies to resolve an uncertainty it may well qualify as R&D. Additionally the design and development of new trading algorithms may also qualify. In practice tax specialists, be they advisors or at HMRC, are typically only ever going to understand a fraction of the real detail in an R&D project so much relies on whether the individuals undertaking the work believe their activities qualify.

For SMEs, the 225% relief is given as enhanced deduction within the tax computation. By way of example if a company has spent £100,000 on a R&D project they will be entitled to a £225,000 deduction in their tax computation. Loss making businesses can either look to carry the additional loss created by the relief forwards, back a year and in some cases sideways through group loss relief claim. Alternatively, they can seek to surrender the loss and receive a direct cash payment, currently 10% of the enhanced expenditure i.e. the £225,000 above would result in a cash payment of £25,000 from HMRC, a particularly useful addition to the cash flow of a start up business in the early years, albeit lower than the value of the loss if used to offset profits.

Although the relief is only available to companies and not LLPs, the inclusion of a company, to incur the costs, in an LLP structure should be a relatively straight-forward process, however, the recent LLP consultation may require that services be provided under a specific contract between the LLP and Ltd in order to utilize the relief effectively. Nonetheless, the support the current Government has given to the scheme in recent years by increasing the relief suggests that it is here to stay in the long term. This provides the kind of certainty that justifies taxpayers arranging their affairs in such a way that they are able to claim all appropriate relief.

Preparing a successful claim can be an involved and time consuming exercise. It requires that eligible projects and qualifying activities are appropriately presented to HMRC in the context of the industry and legislation. As such, technical advice from experienced professionals is recommended to both secure and maximize the relief. Businesses that undertake R&D activities should investigate how a claim may be constructed and the potential benefits for their business.