How UK businesses can identify projects eligible for R&D tax relief

R&D tax relief isn’t limited to companies doing work in laboratories. In fact, almost any company in any industry is eligible for R&D tax credits, so long as the business is undertaking development activities to seek to achieve an advancement in science or technology. Many businesses are doing this in their day-to-day work, from software development and engineering companies to firms working in food production.

How manufacturing and software companies can claim R&D tax credits for the development of new products

Most companies working in manufacturing or software development will be undertaking eligible qualifying activities. If the technical lead of a project (the R&D manager, lead engineer, or lead developer) is struggling to overcome the project’s technical challenges, then it will almost certainly qualify for R&D tax credits.

What type of software projects qualify for R&D tax credits?

Common examples of software development projects that may qualify for R&D tax relief include:

• State-of-the-art software for new projects, or new functionality for existing R&D projects;
• Tools to extend the functionality of application software programs or of an operating system;
• Extensions to database software, programming languages, or operating systems;
• Software development tools, such as tools to port data across platforms, tools for image processing or character recognition;
• Novel data management techniques, such as new object representations and new data structures;
• Innovative methods of capturing, transmitting, manipulating, and protecting data;
• Software to run new computer hardware;
• Software to run on devices with pre-installed operating systems, such as handheld GPS, mobile phones, and tablets; or,
• Means of integrating hardware and software platforms.

What type of manufacturing and engineering projects qualify for R&D tax credits?

Common examples of product and process development projects that may qualify for R&D tax relief include:

• Innovative product development using computer aided design tools;
• Development of second generation or improved products;
• Tooling and equipment fixture design and development;
• Developing unique computer numerical control programs;
• Designing innovative programmable logic controllers;
• Designing innovative manufacturing equipment;
• Prototyping and three-dimensional solid modelling;
• Designing and developing cost-effective and innovative operational processes;
• Integrating new materials to improve product performance and manufacturing processes;
• Evaluating and determining the most efficient flow of material;
• Designing and evaluating process alternatives;
• Designing, constructing, and testing product prototypes;
• Developing processes that would meet increasing regulatory requirements; or,
• Streamlining manufacturing processes through automation.

R&D tax credit claim opportunities available across other industries

Many businesses don’t realise that they qualify for R&D tax credits or that they are not claiming their full entitlement. The R&D tax relief scheme has been in existence for over 15 years and nearly £2bn per annum is currently being claimed. On average SMEs are claiming £46,000 each per year.

If your company is taking a risk by innovating, improving, or developing a product, process, or service, then you can quality for R&D tax credits. The project must contain a level of technical uncertainty for a competent professional, so if you faced questions that left you and your team scratching their heads to find a solution, that’s a good indication that qualifying R&D activities were taking place.

What activities can be included in an R&D tax credits claims?

The following activities would be considered eligible for R&D tax credits:

• Defining technical objectives;
• Identifying uncertainties;
• Feasibility studies;
• Reviewing new and competing technologies;
• Analysing, designing and developing the technology;
• Producing technical specification or other documents to explain and support the R&D project and advancement;
• Testing the product, process or software; and,
• Planning and managing projects.

In addition, certain indirect support activities may qualify for R&D tax relief, such as:

• Administration, finance, and personnel services specifically required to support R&D activities; and,
• Training to support R&D.

Is your business eligible for the SME or large company scheme?

• For a company to be regarded as an SME it must have a group headcount of below 500 staff and meet at least one of the following: a turnover of below €100 million or gross assets of less than €86 million. A large company is any company that exceeds the SME thresholds.
• From 1 April 2015, the relief SMEs can receive has increased to 230% on their qualifying R&D costs. Loss-making companies can, in certain circumstances, surrender their losses in return for a payable tax credit.
• Smaller companies may feel overwhelmed by the HMRC definition of R&D, and may not have the internal resources available to do further research on claiming R&D tax credits. However, HMRC publishes a manual on R&D tax relief and has provided a simple guide on R&D tax relief for small and medium-sized companies. There are also specialist HMRC units able to help with your claim, and you can find further assistance by contacting a specialist R&D tax credit advisor.

R&D tax credit claims made by industry sector

HMRC’s latest statistics for R&D tax credits are for the 2014-15 financial year. Once again, there was an overall increase in the number of tax relief claims submitted, as well as in the overall total amount of relief claimed.

The total number of claims in the 2014-15 period was 22,445, with 18,630 claims under the Small and Medium Enterprise (SME) scheme (an increase of 16%). The industry sectors with the largest number of claims were ‘Manufacturing’, ‘Professional, Scientific, and Technical’, and ‘Information and Communication’.

Although there has been a continuing increase in the number and value of R&D tax credit claims, there are still thousands of companies – especially SMEs – that aren’t claiming what they’re entitled to. If your company is doing ground-breaking, innovative work in any industry, it’s very likely that you qualify for R&D tax credits, and there’s no better time to make your first claim. You can only make R&D tax claims going back 2 accounting years, so if you don’t make the claims now, you’ll be missing out.

By Lauren Olson, Myriad Associates