It is so great to be able to bring you another episode of our podcast, The FI Group Podcast. Each time we’ve been looking at a different aspect of R&D Tax Credits and the work that we do here at FI Group.
For episode 3 we are pleased to welcome Amber Farmington, who works with us at FI Group UK, to talk about tax credits in the UK, what they are, who can claim and how. Amber is one of our R&D Tax Consultants, and works with companies on their claims, so she has a wealth of knowledge.
You can listen right now, or wherever you find your podcasts. As usual we’ve also put together the episode as a transcript, so if you like a long read, then you won’t miss a thing. Here it is:
Hello, and welcome to a podcast series brought to you by the FI Group. In today’s episode, we are going to be looking at what R&D is and why companies should claim for it. FI Group are leaders in the field when it comes to R&D. So, in this episode, we want you to get a better understanding of how you can benefit from this claim in the UK. Today, I’m joined by my colleague, Amber Farmington, who will give you a better understanding of what she does and how you can claim in the UK.
Hi Leon, thank you for having me. So, I am a Research and Development Tax Consultant here with FI Group UK. And my job is to apply for and secure R&D tax credits, for companies that are investing in innovation.
So, first question for yourself is, what are R&D tax credits?
Well, of course that’s what you want to know. So, R&D tax credits coming in the form of either a cash payment or a corporate tax reduction are a government incentive designed to reward UK companies for investing and innovation. Companies spending money, developing new products, processes, or services, or improving upon existing ones, can all be eligible for R&D tax credit.
One of the misconceptions within our field is, what industries are entitled to claim R&D tax credits. So, if you don’t mind telling us a bit about that?
Yeah, of course. All industries are eligible to claim actually. There is a common misconception that R&D is only done in white lab coats. However, the scope for identifying R&D is huge, and exists in every single sector. To benefit from R&D tax, you simply must be a limited company in the UK, of course, subject to corporation tax, have carried out qualifying research and development activities, and of course have spent money on these projects.
So, I know you mentioned companies that are developing new products or processes may be eligible, but how exactly do projects and their activities qualify?
So, the HMRC criteria for qualifying research and development activities is intentionally broad. So whatever size or sector, in order to qualify as R&D, companies must be able to demonstrate HMRC, that their project encompassed scientific or technological uncertainty, and that they took a risk by attempting to resolve this uncertainty. So, for example, let’s say you are developing a new cloud-based, cyber security platform. This is likely to be a qualifying activity, as computer networks are coming under a growing number of securities risks every single day. And this is due to hackers becoming more sophisticated and intelligent in the ways that they go about hacking computer systems and networks. As such network security is a constantly moving target. As cyber criminals are continuously finding new and harder to detect ways to infiltrate networks. So, a security solution capable of monitoring, analyzing, and updating threats in real time is an essential tool in the fight against cybercrime. This is a very good example of qualifying R&D activity under the R&D tax incentive schemes, because it would be a technical challenge for even the most experienced, network security specialists, to ensure a fully robust and secure computer network at all times.
So, what about if you’re trying to improve a product? How would that work?
Yeah, so let’s maybe switch to another industry. So, let’s say that you have a company that sells bottled beverages. Historically you’ve colored these beverages with synthetic ingredients. Due to increasing demand for healthier products, you decided to undertake a project to replace these synthetic ingredients with natural ingredients, thus improving the product. However, switching from synthetic to natural ingredients can impact factors such as the taste, color, shade, stability, and shelf life of the beverage. If you don’t know how you are going to reformulate the color of the drink using natural ingredients, or, you know, you don’t even know if it’s possible, then you could be carrying out qualifying R&D activities. In other words, if you’re not sure if you’re a new or improved product or process as possible, or a competent professional doesn’t know how to achieve it in practice, you could be resolving technological uncertainties and carrying out qualifying R&D.
This is a question that I get quite a lot. So, if you don’t mind explaining the term competent professional?
Yeah, definitely. And this is a question that we get all the time, as we’re kicking off claims. So HMRC talks about competent professionals as those that are well versed and knowledgeable of your research and development activity. So, this refers to a specialist person in the industry with the right qualifications experience and skills for the job in hand. For example, this might be a process engineer in a chemical manufacturing plant, or a software engineer developing, you know, an innovative software solution.
Now, when it comes to the financial aspects of a claim, what qualifies, what costs sorry, qualify for R&D tax credits?
Yeah, so when putting together an R&D tax credit claim, we look for qualifying R&D expenditure such as staffing costs. So, this includes salaries, the employer paid NI and pension contributions, and then reimbursed expenses, subcontractor and freelancer fees, materials, and consumables. So, this includes heat, light and power that are used up or transformed by the R&D process, some types of software we can include in the claim and then payments to any subjects of clinical trials. So, depending on the size of your company, we use these qualifying costs to calculate the R&D tax benefit.
So, Amber, you mentioned at the end there, depending on the size of your company, why is this important?
Well, Leon, I am glad you asked. The size of the company matters because there are actually two R&D tax credit schemes. So, there is the SME scheme, which most companies, including startups fit into. And then there is the large companies’ scheme. So, the R&D tax credit is calculated based on the R&D spend. And there is no minimum R&D spend required. So, in order to calculate the credit, you need to identify qualifying expenditure. So, these were those staffing costs, raw materials, and consumables that I mentioned earlier. And then you enhance it by the relevant rate, which differs per scheme. And that is one of the main differences of the two schemes.
So, when you deduct your enhanced expenditure from your taxable profits, or add it to your loss, you will either receive a corporation tax reduction. So, this is in the case, if you are a profit-making company, or you will receive a cash credit, if you are in the scenario where you’re loss making. Sometimes during a claim, you could find yourself receiving a combination of the two, but it will always either be a corporate tax reduction or a cash payment that you receive, in the claims, the end of the claims process. Under the SME scheme, companies are able to claim up to 33% back of whatever was spent on R&D activities. And under the large company scheme companies are able to claim back up to 13%, of whatever was spent on R&D activities. Does that make sense?
One of the questions I get asked the most, once we find out a company does qualify for R&D tax credits in the UK, is how long does it take for the company to receive their benefit payment and how much can they get on average?
Yes, I think this is probably one of the most important questions of all, isn’t it? So HMRC takes about four to six weeks to process R&D claims and then payment is issued immediately. As far as the average claim size, I believe in the 2018 period for SMEs in the UK, the average claim was a benefit of 55,000 and under the large company scheme, the average claim size, was about 600,000.
So next, how simple is the process?
The process is simple enough, simple to professionals. But it can be daunting for companies who are attempting to interpret the legislation and make the claim themselves. The guidelines from HMRC are often vague and are open to interpretation at times, which means that there are some gray areas that only come with experience and knowledge, especially when you’re trying to optimize a claim to ensure a fair representation and benefit for an R&D project.
So, what does FI Group do to help the process?
So our team consists of experienced consultants that work directly with the competent professionals to identify eligible R&D activities, alongside working directly with your accountant to ensure we’ve captured all qualifying costs and maximize your R&D tax credit. We all have professional backgrounds in the various industries that we claim for, to ensure that we understand and are able to extract all of the relevant information needed to provide a strong, robust claim report. We work with you throughout the entire claims process, so this is from scoping to submission and deal with any HMRC inquiries after the fact.
Okay, thanks for that, Amber. And what information should people collect before contacting the FI Group?
If you think that your company could be undertaking qualifying activities, you can contact FI Group at any point. However, it always helps to have a project list, and an idea of how much was spent on the projects. And we can take everything from there.
Now I think the answer to this is obvious, but why should a business claim for R&D tax in the UK?
Honestly, R&D tax credits can really transform your business. I mean, they are a form of innovation funding, and we have seen it happen. Especially right now, you know, during these unprecedented times, there’s so much uncertainty. It’s a way for innovative companies to continue to grow. And if a company is claiming for the first time, we can claim back up to two tax years.
Perfect. So that’s it for this week’s episode. I want to thank Amber for joining us this week. And I hope that this episode has helped you get a better understanding of what R&D credit is and how the FI Group can assist you with your claim.
If you liked this episode, please subscribe so you don’t miss out on future episodes. To find out how we can support you in your claim, please head to fi-group.com for more information, or contact us today. I’ll be back in two weeks’ time. Thank you for listening.