CONTINUEThis site uses cookies. By continuing to browse this site you are agreeing to our use of cookies. Find out more.
  1. Front Page
  2. Contributed Articles
  3. Research and Development Tax Credits - not just for the boffins

Research and Development Tax Credits - not just for the boffins

Contributed by Contractor Unlimited
May 14, 2019

From now on I'm going to shorten this mouthful to R&D and ask you to stick with it. It might sound boring but is in my opinion the second most exciting tax break left for businesses.

I have been aware of R&D and worked on a couple of Research and Development projects over the years and always thought of them as white coats and Frankenstein flasks. You get the idea, it's dark, there's a storm coming and the mad scientist is running round the lab cooking up unspeakable chemicals. Recently though, I have had the opportunity to work on quite a few after one simple revelation.

It's not just your mad scientists that need apply.

The revelation

A client of mine was designing something new. It wasn't rocket science, it was a way of delivering the stuff he knew to his employees in a way they could use with his clients. Kind of like downloading years of experience and a little bit of his personality onto a web app.

Think 'management consultant' - these guys are everywhere and what they do is copy other people's good ideas and sell them far and wide. What this client was doing was organisingall of his good ideas into a usable database with a couple of modelling tools he had paid to have written.

This meant the guys on the road could deliver his methods consistently. If someone couldn't show up to work on Monday, one of his other lads could step in and do the job the way it should be done. He wasn't inventing super computers or building rockets - he was just making something that he didn't know would work to deliver better service to his customers.

This 'not knowing it would work' is important. There has to be uncertainty. But the chances are if you have done anything a bit clever over recent years and it turned out that it works, you didn't know that it would when you started.

My client had his R&D claim accepted a few weeks ago and added just over £10k to his bottom line. This year and every year going forward until the project is delivered. So, I applied the same framework to three other client business and the specialist report writer I use tells me they will get the same or more.

All that being said, normal businesses like yours or mine can qualify for this and there is very little downside. You do need a specialist to write the stuff for HMRC, but even they work on a no-win-no-fee basis. The only risk warning I would add, is that not all R&D specialists are created equal....choose wisely and if you want an introduction to one of the good ones, I am happy to help.

What's in it for you

It goes like this. You spend £2.5k on something, this is deducted from your sales. It doesn't matter if it's software or a new widget pressing machine. You don't pay tax on it, which saves you 19% (I know it's not quite this easy but I have to assume that not everyone reading understands depreciation). If you qualify for R&D you get up to 1.3 times this amount to add to this so that's another £3,250. This puts another £617 onto your bottom line.

It isn't just the software though - the amount of time that you spend on that software also gets added in. So, if you spend half of your time on the project and pay yourself a salary of £15,000 a year and a pension of £5,000 that's another £2,470 straight onto your bottom line. This is fairly small stuff we are talking here, by the way, one of my clients is currently building a £100k software platform!

Think how much stuff you would have to sell to add £3k in profits...then remember I deliberately used a tiny wee example to make my maths easy. A second business we are working with today on R&D in a £1million turnover resale business with clever buying systems. The math's are the same, just bigger.

It doesn't stop there though, if you then get half your guys trialing your new and exciting project with clients in 'field tests' up to half of their costs could also be allowable. This is called the 'deployment' rate and the only bit of jargon I will use in this article. It's all worked out with the R&D guy anyway in a sensible way that keeps you safe.

Now don't get me wrong, you can't get this benefit for 'business as usual', you do have to be doing something novel. I don't know about you, but in my experience almost every entrepreneur I work with is doing something clever.

This means that if you are a really successful window cleaner making fortunes cleaning windows the way they have always been done then you don't qualify. If you spend some of your time dreaming up ways of cleaning windows better, then you just might.

When you think about it...

We are not trying to shoe-horn clients into the R&D rules, we are getting good quality businesses to think in innovative ways. Absolutely and exactly what this tax credit is designed to do. Personally, I have spent months working on automation and integration of three different systems to serve our customers better.

I am spending:

£1,000 a month on software
£700 a month on a consultant
Half of my time on the project
Half of one of my team's time on testing

I didn't start with R&D in mind, I just wanted to develop something that worked for my business better than I could buy off the shelf. The R&D credits have just driven me further and faster than I would have gone if it was just an old fashioned allowable business expense. I'm going to have a competitive advantage, happier clients and make more money if the project works. Oh yes, and by the way, probably about another £20k of overhead free revenue (that's called profit). Too many wins to list.

I am happy to talk this through with anyone. I am personally unlikely to take on your project (unless your project comes under the heading 'oh, now that's clever' and gets my interest) as I usually only do this for clients. I will introduce you to the best specialist I have met in this market if, after our chat, I think it's worth yours and his time.

All that being said, my only regret in this market is that I didn't meet this guy earlier as I think a couple of clients I know well, might have qualified in the past if we had met earlier.

In summary

I know 'Research and Development Tax Credits' sounds boring but ignore this at your peril. I don't know about you, anything that puts cash straight onto my bottom line always gets my attention.

All of that being said, it isn't for everyone. If there is no risk and no uncertainty, really business as usual, you aren't going to get it. You do not have to be inventing Facebook or even writing brand new software to qualify. If you can't buy what you really want off any shelf, then this might just be for you.


Tags: business | tax | employees | interest | Tax



Back to Articles

Tax-News Reviews

Cyprus Review

A review and forecast of Cyprus's international business, legal and investment climate.

Visit Cyprus Review »

Malta Review

A review and forecast of Malta's international business, legal and investment climate.

Visit Malta Review »

Jersey Review

A review and forecast of Jersey's international business, legal and investment climate.

Visit Jersey Review »

Budget Review

A review of the latest budget news and government financial statements from around the world.

Visit Budget Review »

Stay Updated

Please enter your email address to join the mailing list. View previous newsletters.

By subscribing to our newsletter service, you agree to our Terms and Conditions and Privacy Policy.

To manage your mailing list preferences, please click here »

Network Blogs and Features