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Are you making the most of your R&D incentives?
More and more engineering firms I talk to in my day-to-day job are now aware of and claiming some form of research and development incentives, but not many are getting as much as they could from the scheme.
Even though the dominant image of R&D being done by people in laboratory coats for big pharmaceutical companies is fading, most firms still tend to focus on the part of the business they already call R&D or new product development (NPD) – the obvious, core engineering part.
But the definition for tax purposes is much broader in its scope. You need to understand the breadth to ensure you are maximising the credits you receive, in terms of both the activities that qualify and the cost categories that can be claimed. The person best placed to do that is often the engineer.
I have a dual background, so when I go to a company, the person I really need to talk to isn’t the finance director – it’s the engineer. Of my two hats, I go as a mechanical and marine engineer, not as a chartered tax advisor.
When I talk to them, they may call what they do NPD, application or value engineering. Engineers often talk about ‘tweaking’ this or that. But no matter what they call it, often it’s potentially R&D in tax terms. R&D for tax purposes is an advance in a field of science and technology, which can be a new product or process or an appreciable improvement over what already exists or how things are done, while being challenging. The development doesn’t have to be a performance improvement – it could be value engineering-based.
The other area I deal with a lot is what happens after the first claim – what I call the catch-up claim, which can backdate up to three years, depending on when your financial year ends. After that initial claim, HMRC will expect the claims to be made on an annual basis. That doesn’t automatically mean introducing timesheets or similarly onerous processes. We help firms to keep this in proportion. For big firms, it can mean a real-time reporting framework. For smaller firms, it can be a simple journal – as long as it’s more than a ‘best estimate’.
The scheme is well-established – the fundamentals haven’t changed for more than 10 years. But it does evolve. For example, next year there will be some changes, ‘tweaks’ even, an advance assurance scheme to make the scheme more straightforward for small firms. We know about these changes, but do you or your regular tax accountant? All too often, companies claim only a proportion of what their hard work and expertise is due.
There may be extra credit not realised in your business, or there may be indirect activities associated with R&D that you could be claiming for. But you should make sure you are making the most of your credits and dealing with your incentives properly.
For more information on R&D and other innovation incentives, contact cknott@uk.ey.com