Are you asking the right questions about innovation?
Innovation. A term thrown about by business leaders around the world, it has become the buzz word of the 21st Century - even though its importance isn’t entirely new.
Thanks to the great success stories – like Steve Jobs at Apple – innovation is now much higher on the business growth agenda.
Innovation has historically been something driven by bigger organisations; after all, these larger companies have more time, bigger R&D budgets and the best people. The trouble with that way of thinking is that it stifles the essence of what innovation is all about – making something new or doing something in a different way.
Because this often requires a fresh set of eyes or a new way of looking at things, it shouldn’t be restricted to just a few minds. The good ideas shouldn’t just come from those who can afford the “thinking” and “development” time.
Aware of the significant cost and impact R&D had on SMEs, HMRC introduced the R&D Tax Relief scheme with the idea that it would, “…benefit companies striving to achieve technical and scientific advances through projects that extend the current industry baseline, and where uncertainty in the outcome exists and the methods used to achieve success are not readily deducible.”
R&D Tax Relief applies to both profit making companies paying Corporation Tax and to loss-making companies that are not. The relief can be received as lowered Corporation Tax or, in some cases, a cash credit. And, although it is obviously a more complicated beast, based on a variety of factors, it typically amounts to around 26p for every £1 you have spent on eligible activities.
Unfortunately, due to several factors, not least general awareness of the relief, the number of SMEs taking up the scheme is not as great as you would expect. And some of this comes down to a lack of strategic and financial business planning where business owners take a more reactive approach. This can become a problem when it puts other, unforeseen, limitations in place for future options.
Grants, for example, have long been a go-to finance option for the average SME. And why not? The promise of ‘free money’ and ‘no strings’ is of huge appeal to a business that can’t afford loan repayments and don’t want to (or can’t) give away equity.
In the case of the R&D tax relief however, if the grant you have received is classified as state aid, then you cannot claim R&D tax relief for the same project. And, if the grant is not state aid, there are still some restrictions that will likely impact the percentage of relief you do in fact receive.
What this highlights is the importance of forward planning. The requirement for you to look beyond what is feasible and appealing in the short term, and what may be more beneficial in the long term; by giving you more options.
Many business owners and leaders, whilst confident with the practical day-to-day running of their organisations, are not 100 per cent certain when it comes to matters of financial planning.
And they need not be.
There is some unspoken myth that business people come to believe where they feel the need to ‘master’ all areas of their businesses. It is simply not feasible. In fact, the most successful business leaders are those that understand their own limitations and proactively seek out the knowledge they require; well in advance of when they need it.
For example, another area that often catches out those applying for R&D Tax Relief is in claiming directors as sub-contractors. Sadly, this is not allowed and it is checked carefully by HMRC. Neither can you claim directors’ dividends against the qualifying expenditure. And consideration also needs to be given to whether you file qualifying development expenditure under ‘Tangible Assets’ or ‘Intangible Assets’. It all comes down to what you are making, and what percentage claim you can make against the cost as a result. But knowing the finer details, ins and outs and what that means will help you to get the best possible percentage relief for your claim.
Ultimately, we need to remember that this is a tax relief and, to ensure that it is a legitimate claim, there are certain boxes that need to be ticked, ‘I’s to be dotted and ‘T’s to be crossed. And whilst there is a question as to whether enough SMEs are claiming for their investment in R&D, there is also a question as to whether those claiming and qualifying are receiving all that they are entitled to because of how they have chosen to make their claim.
For us the message is simple. This is a finance and tax related matter and, if in doubt, seek assistance. Not just with the practicality of completing a form, but as part of your strategic planning for the future. If you are looking to invest in R&D, new machinery, premises, staff or simple growth capital, take the time to speak to a professional advisor. Their broader knowledge of the industry and options could prevent you from making an expensive decision.
If you are interested in finding out more about R&D Tax relief, please get in touch. Our specialist R&D Tax Relief advisors will be able to check your eligibility and help you through the application process.