How HMRC can be a source of cash for your business!

hmrcBANK LENDING DOWN, DEMAND FOR LOANS UP.

With some of the banks’ lending less to companies, there can be another source of cash - HMRC

No, really. The Bank of England’s recent publication “Financial trends, April 2015” shows that most banks are lending less to the SME sector year on year. In another report by the Financial Conduct Authority, demand for bank lending is predicted to rise over the next year.

SO HOW CAN HMRC BE A SOURCE OF FUNDS FOR SMALL BUSINESSES?

The magic phrase is of course “R&D tax credits”. What are R&D Tax Credits? in essence it’s a scheme designed to encourage innovation in the UK. The government wants to support UK companies that develop their own products, on the basis that those companies will grow, will employ more people and pay more tax.

However, some recent statistics released by HMRC shows that just fewer than nineteen thousand companies lodged a claim under the R&D Tax credit scheme. That’s a tiny proportion of the one hundred and fifty thousand companies in the UK eligible for R&D Tax Credits, by the Governments own figures.

HOW DO I GET MY HANDS ON R&D TAX CREDITS?

So would R&D Tax Credits apply to my company? As a starting point if your company took the financial risk of developing its own products and those products are innovative then you probably have something worth investigating.

However, you need to show that you have overcome “technological uncertainty”.

What does “Technological uncertainty” actually mean?

Well it means that your team came across problems that were unexpected and the team wasn’t aware of an obvious solution. They probably had to try a couple of different methods to solve the problem and there was a good deal of head scratching to get round these difficulties.

There is a lot of confusion as to what qualifies under the scheme but companies usually know if they have been innovative during their product development.

Competitive markets mean companies are always being asked to introduce more functionality which means that development rarely stops. This means most companies submit a claim every year.

I’VE BEEN TOLD THE AMOUNTS INVOLVED ARE PEANUTS.

UK limited companies who have developed their own products may qualify to recover typically 25% of their development costs if they meet the criteria of the scheme.

Under this scheme you do not have to have paid any tax and the company does not have to have made a profit. You are also able to claim up to two years in arrears.

This scheme will either provide a tax credit or return cash in other circumstances

This scheme will even cover any valid projects which ended in failure.

The projects don’t have to have resulted in products which went on to be sold.

So how much as we talking about? Companies frequently recover twenty to thirty thousand pounds with no tax liability. Many companies recover forty to sixty thousand pounds and larger claims are not infrequent. A reasonable number is over one hundred thousand pounds.

OK, I’M SOLD - HOW DO I GET MY HANDS ON R&D TAX CREDITS.

Let’s examine the process. HMRC set up specialized R&D units across the country. They are the unit that receives the claim and identifies whether the claim meets the criteria.

Under the scheme you identify the costs relating to development work which qualifies, uplift these costs as allowed by the scheme and submit them to HMRC on your corporation tax form.

These costs include the time of individuals involved in qualifying work, senior management time, materials, sub-contractors, proto types and other costs.

Every claim is lodged through the CT600 Corporation tax form which a company completes at the end of the financial year. If you claim for a previous financial year you submit an amended CT600 for that financial year.

The CT600 contains the boxes you enter the adjusted numbers in to.

You also need to submit a technical justification which identifies the difficulties you faced and how you overcame them.

WHAT ARE THE GOTCHAS?

We think that the process of claiming under this scheme is a major factor in the limited uptake of the scheme

Accountants typically are uncomfortable looking at the technical aspects of the claim and directors are naturally nervous about claiming when they are not entirely sure whether they meet the criteria.

The technical justification can be time consuming and the content required might not be entirely clear.

DO YOU QUALIFY?

Let’s start by identifying some clear criteria that a company would need to meet. If you can answer yes to these questions you should take the matter further:

Is the company a UK limited company?
Did you develop the products at your own expense?
When developing them did you have to overcome technical problems which had no obvious solution.
Have you ever undertaken any development projects which failed?
Do you believe your products are innovative?
Have you undertaken work to make your product faster, greener more efficient?
Have you improved your own processes?

NEXT STEPS

If you think you can answer yes to those questions then what is the next step?

It is absolutely true you could submit a claim by reading all the documentation, learning all the rules and all the costs which are valid and dealing with HMRC yourself.

However, it is far better to use a R&D Tax Credit consultancy who specialize in this area. They normally work on a no win no fee basis so you have no financial risk and they can usually tell you whether you meet the criteria of the scheme after an initial conversation. They will liaise with your FD or Accountants and most importantly will be responsible for producing the Technical Justification, which most accountants find difficult.

Choose a company you feel comfortable with and let them take the strain of completing the work.

A good consultancy will save you countless hours, a lot of uncertainty and ensure you maximize your legitimate claim.

Cash from HMRC - who would have thought it.

If you would like help to understand whether you qualify for R&D Tax Credits then call us on 0207 743 6504. Or, click on the link below to send us an email.