22 March 2021

Are you Claiming Your R&D Tax Relief?

The Research and Development (R&D) tax credit was introduced in 2000 and is a generous tax relief (an extra 25p for every £1 spent) supported by HMRC as a way of rewarding UK businesses for undergoing innovative development in their company.

Given the financial impact of Covid-19 and the corporation tax rate increasing to 25%, it is now more important than ever that print companies are making the most of this valuable relief.

 In September last year HMRC released their updated R&D statistics which showed a clear image of the industries that are claiming R&D credits. From these statistics it is evident that the printing industry is significantly under claiming compared to other industries and we think the two reasons for this are:

1) That most businesses do not believe that they qualify for the relief; and

2) Some believe that the claiming process is too complex.

However, in reality a lot of print activities can be classed as R&D and they do not necessarily involve the stereotypical ‘white lab coat’ to be classed as this.

As part of Garbutt + Elliott’s Partnership with the BPIF we have saved UK print companies almost £1 million in R&D tax relief.

Once we have helped you ascertain which projects qualify for the tax relief, the next step is to quantify the costs that can be included in the claim. HMRC have specific cost categories as to what costs can be included in the claim:

·        Staff costs (including Salaries, Employer’s NIC & Pension Contributions)

·        Subcontractor costs (Restricted to 65% for unconnected sub-contractors)

·        Externally provided workers (Restricted to 65%)

·        Software license costs

·        Cost of consumable items (Items consumed, transformed or destroyed in the R&D process)

Different rates of tax relief

There are two different rates of tax relief, one aimed at SME’s and the other aimed at large companies. The tax saving for SME businesses equates to around 25p for every £1 spent on R&D.  It is a complex calculation an SME receives an additional 130% super deduction which is applied to the above cost categories that relate to R&D activities. This is effectively an additional deduction in calculating a company’s taxable profits (hence reducing the corporation tax bill). If the R&D relief creates a loss for the business, then the losses that are created can be swapped for a refund of 14.5% of the losses that arose. The tax saving for large companies is slightly different; large companies are paid a 13% taxable tax credit based on their qualifying R&D expenditure.

As part of Garbutt + Elliott’s Partnership with the BPIF we have saved UK print companies almost £1 million in R&D tax relief.

Within the printing industry technology is progressing at a phenomenal rate. This progression frequently constitutes R&D for tax purposes and examples of qualifying R&D in the printing industry include:

Software development

As print companies develop their software this can often result in an advance in computer software technology.  For example, combining your pre-existing technology with an off the shelf technology can often be extremely complex.

Experimentation with different substrates and inks

Experimentation with the methods of printing is a good example of R&D in the printing industry, this experimentation with different substrates and inks enables businesses to offer unique and innovative new products for their customers.  The science behind this can often mean companies have to undertake huge amounts of trial and error.

Developing and adapting new print machinery 

Due to the technology within the printing industry progressing at a fast rate it is important for businesses in this sector to continuously find ways of improving their production methods. This could be purchasing a new piece of equipment and developing it to fit into the production process or it could be making significant improvements to older equipment and ensuring they perform better than they had before.

Changes in R&D Practice in Print Industry During COVID

The COVID pandemic has impacted a lot of companies in drastically different ways, some have thrived due to the increased need for their products whereas others have had to adapt to the new norm. This adapting can lead to an increase in R&D activity that may not have been there before such as the development of a piece of software to adapt to the new way of business or printing on a new material due to COVID restrictions.

Budgetary Updates for R&D Tax Relief

HMRC have two ongoing consultations with the aim to make improvements to R&D tax relief. The first relates to the response to the scope of qualifying expenditure for R&D tax relief. In the consultation it briefly outlines the consideration of the inclusion of allowing the costs of accessing datasets and cloud computing costs. A lot of businesses who undertake software development for R&D purposes use these costs to assist in the development, as HMRC are starting to look at this it makes software development in the print industry even more beneficial once included.

The second consultation relates to the nature and effectiveness of the tax relief, from this consultation we have found the following key areas:

·        HMRC want to ensure that the R&D tax relief scheme works as well as it can and is well targeted to maximise the Return on Investment for British taxpayers;

·        HMRC may look at consolidating the two schemes in the future so SME becomes a more beneficial version of the RDEC claim;

·        The consultation mentions a lot of examples of companies abusing the system, it is important that companies submit a really robust claim by collecting as much evidence of the R&D as they can.

Another upcoming change is that HMRC are set to reintroduce the PAYE cap to the SME R&D tax credit claims. From 1 April 2021 businesses will only be able to claim tax credits worth up to £20,000 plus 300% of their combined PAYE and NIC liability (with some exceptions). This regulation is designed to protect R&D tax credits from claimants that abuse the relief. This implementation will largely impact start-up businesses or businesses who subcontract a large amount of their R&D to third party companies.

The final key update that came from the budget is the increase of corporation tax from 19% to 25%, a significant increase. This increase makes the tax relief even more beneficial, for example: as previously mentioned in this article an SME claim at a corporation tax rate of 19% will work out as a tax relief of approximately 25p for every £1 spent on qualifying R&D expenditure. However, with the increase to 25% this will increase this to just under 33p for every £1 spent.

Research and Development tax relief is a complex area but can deliver huge value, if you require more information or advice get in touch.