R&D also has significant value to the wider economy. Take IT innovation, for example, and the way that developments like cloud computing, mobile apps, ‘smart’ IoT devices and much, much more have transformed the world we live in. And that’s just in the last decade. Each new chip set, each new networking protocol, each new piece of software starts off as the germ of an idea in an R&D project.
That is one reason why the government seeks to encourage and support R&D activity by offering tax credits. An economy where no R&D takes place is an economy that has stalled. Another reason is that R&D is expensive and potentially high risk. There is no guarantee for any company that a new product it is working on will ever make it past the proof of concept stage and become commercially viable. For every successful innovation, there are plenty of false starts, and that costs. The R&D tax relief system is intended to take some of that weight.
And yet a large proportion of companies who would qualify for R&D tax credits are failing to claim them. That means millions of pounds a
year are being drained out of the economy unnecessarily as companies struggle to fund their R&D programmes themselves. There are various reasons why R&D tax relief is not being used to its full potential, ranging from a view that the application and accounting process is overly complex to misinterpretation of the criteria for qualification.
Undoubtedly, there are a number of myths shrouding the truth about R&D tax credits which are getting in the way of the system being used properly. Let’s take a look at some of the main ones.
Somewhere along the line, the idea has got out that R&D tax credits are only available to big businesses, or only to specialist tech companies. Neither is true. Unfortunately, the majority of businesses missing out on R&D tax relief are SMEs, yet there is nothing in the rules and regulations that specifies the size or type of company that can apply. Similarly, although technology is a productive area for research and development activity, it is by no means the only one, and you certainly do not have to be a tech specialist to claim relief.
It is easy to see where this particular myth has arisen from. We naturally associate R&D with creative development – new products, new systems, new technologies. But the point of the R&D tax credit system is not to reward the output of research and development activity – you don’t have to wait until you have a breakthrough new product to demonstrate before you can claim. Indeed, R&D tax credits are intended to support the process of research and development, not the results, and there are therefore a long list of expenses you can claim relief for linked to your activities.
When companies are asked why they haven’t applied for R&D tax relief when it is obvious they are eligible, it is common to get answers like – the application process is too complicated and I haven’t got the time, or it takes too long to get the money, or I won’t get enough to make it worthwhile. Some of these views stem from the fact that, in the past, the system was clunky and could mean the application process dragged on, but a lot has been done to improve the process.
But the biggest issue is around businesses not realising just how much R&D tax credits can be worth. SMEs are actually able to claim more than larger organisations, with credits available up to 33p in every £1 spent on qualifying activities, and an average pay out of around £50,000. For most small businesses, those are certainly sums that are worth the trouble.