Knowledge Base

Novel, R&D tax relief, RDCF

Discussing the proposed updates by HMRC to R&D Tax Relief

The UK government announced updates to a number of tax policy measures on November 30th as part of the “Tax Administration and Maintenance Day”, in an attempt to modernise the UK’s tax system and combat non-compliance. 

The substantive policy changes included:

  • The inclusion of data and cloud computing costs as an eligible qualifying expenditure category
  • The clampdown on overseas R&D activities, with emphasis instead placed on incentivising domestic R&D activities
  • The improvement of compliance within the industry as a whole

In addition to the above, HMRC also made reference to some further policy updates at the Research & Development Communication Forum (RDCF) which was held in early December. After attending the forum and reading through the above policy changes in detail, we have summarised our initial thoughts below.

Data and cloud computing costs

Buying datasets

We have spoken at length in another post about the proposed changes to the data and cloud computing costs and what it will mean for businesses so we will only briefly summarise them. If you want to learn more, read our blog post about it here.

Following the changes, businesses will be able to claim R&D tax relief on expenditure that is linked to buying datasets that are directly used for qualifying R&D. However, companies will not be able to claim relief on costs on datasets where the information will be resold or have lasting value to the business beyond the duration of the R&D project. Whilst this definition is made in a similar manner to consumable costs, how this is interpreted in practice is yet to be seen. Data is often consumed during the training of an algorithm and, assuming the project is successful, will have a lasting value within the business if that algorithm is then used commercially.

Staff costs in relation to datasets

Businesses will be able to claim relief on staff-related expenditure for the purpose of collecting, cleansing and analysing data. Although you were already able to claim relief on staff expenditure that is directly tied to the R&D project, the government wants to make their position on this clear in relation to the guidance. 

Cloud computing and software

Raw data is often required to be further analysed and modified in order for it to be available for interpretation. The government will now allow businesses to claim relief on the cost of cloud computing services and software used directly for R&D if they are used for computation, data processing and analytics. 

Caution needs to be taken though that some software performs more than one function, such as analytics and storage. The scheme specifies that storage does not qualify for relief. The reason that costs relating to servers and data storage are not included is because they are seen as overhead costs, akin to rental costs, which are not considered a qualifying expense for R&D tax relief.

In practice this means that if you use software that incorporates multiple functions such as AWS DynamoDb, which can act both as a storage and analytics tool, the costs need to be apportioned as the business will only be able to claim for the analytics costs. However, for other software, such as AWS Lambda, which is fully used for data processing and analytics, the business will be able to claim the full amount.

Overall, compared to other proposed changes, it appeared that this area had the least debate and questions surrounding it. Most questions focused on two things. Firstly, the practicality of being able to apportion costs of software programmes. Secondly, whether it is reasonable to expect data not to be reused for other purposes and projects. At the RDCF HMRC confirmed that the details are still being finalised which unfortunately didn’t shed any further light on this subject for now.

Overseas R&D relief

This proposed change was one of the two that raised the most follow up questions and concerns. Currently, under the SME R&D tax relief scheme and RDEC, businesses are able to claim relief on R&D activity that is conducted overseas. 

However, in an effort to refocus R&D investment and innovation domestically, the government is proposing to limit the relief to R&D activity that has only been undertaken in the UK. This relates to all qualified expenses, such as staff costs, subcontractor costs and EPWs, the only exceptions to costs outsourced overseas were for data, cloud, software, clinical trial volunteers and consumable costs. In addition, if you hire a subcontractor and they rely on overseas staff, relief will only be available on expenditure that has been performed within the UK.

This presents a number of challenges that can be broken down into three questions: 

  • What if R&D must take place overseas, for example, due to regulatory issues in the UK?
  • How does a company ensure an unconnected subcontractor or staff provider doesn’t engage with overseas workers in delivering their service?
  • What does this mean for companies that have international subsidiaries?

From the discussions at the RDCF, it appears that HMRC have a rather rigid opinion that most expertise required for R&D work in the UK can also be found in the UK. Whilst this could be true for certain industries such as software development, this isn’t clear cut for others. At the RDCF, an attendee raised the point that sometimes overseas R&D expenditure is required, for example studying climate change that requires staff to be posted abroad near glaciers, or relying on clinical trials to be conducted abroad, much like the case with AstraZeneca and developing the COVID vaccine, where the trials took place in Brazil and South Africa which allowed them to gather more data

Moreover, in both these cases time and urgency appears to be a factor, which makes one wonder whether taking R&D abroad to expedite the project would qualify for relief. HMRC representatives appeared to respond favourably to these examples although no definitive answer was provided. 

During the forum, we tried to ascertain how HMRC suggests companies ensure that the work is carried out by subcontractors whose staff is based within the UK was left unanswered. It will be interesting to see how this works in practice, as it seems unlikely that businesses will be privy to this sort of information from their subcontractors, unless they are connected parties.

Likewise, HMRC confirmed that if the policy changes are implemented as currently planned, this restriction will also impact connected parties or companies that have overseas subsidiaries. Considering that the reason for this change is to ensure that the R&D relief is reinvested back into the UK, not allowing connected companies or companies part of international groups that are owned by a UK tax paying entity to claim relief on overseas expenses may seem counterintuitive to stimulating R&D taking place in the first instance.

Overall, it is still unclear whether this will go into effect and there is scope for this to change as the government is interested in hearing stakeholders’ views and suggestions. If the stakeholders are able to justify overseas expenditure without detracting from the focus on encouraging UK innovation and promoting UK industries, this point may be reconsidered. 

Improving compliance 

There have been some concerns over abuse in relation to the R&D tax relief claims over the past years. Some of the proposed changes to mitigate these issues is to require more information and make all claims digital. 

In terms of adding more detail about each R&D project it is hard to tell what effect it will have on the claim process. In practice, it is very difficult to prescribe a set format for the ‘Technical Narrative’ which outlines qualifying work, given R&D could be undertaken in vastly different industries. As of now, the legislation does not require the submission of supporting documentation for an R&D claim. In essence, this means that a claim can be submitted without providing a ‘Technical Narrative’ and instead, the one number is included on the company’s Corporation Tax Return. The government may look to change this in the future and legislate for supporting documentation, though how this is achieved in practice is somewhat speculative at the moment. 

Likewise, when asked to clarify what HMRC meant by digital, they said ‘submitted by COTAX or IXBRL’, which could mean that HMRC is aiming to standardise how it is receiving all the information about R&D tax relief and will stop receiving claims through post or email. In the past, HMRC’s willingness to accept CT600 amendments by email has led to delays. It, therefore, seems that the move towards digitalisation will help ensure claims are processed in a timely manner.

In addition to the above-proposed changes, the claims will need to be endorsed by a named senior officer of the business and include the details of any agent who advised in compiling the claim. Ultimately the company is responsible for any R&D claim made by the business, though as it stands no one individual needs to put their weight or credentials against the claim. Again, this is already captured already through the inclusion of ‘Competent Professionals’ on the narratives, though in practice this can sometimes be hard to implement, given that one individual may leave the business.

Similarly, in cases where companies may use a third party R&D consultant to do their claim but their accountants input the R&D figures to a CT return, who would be held responsible? What would accountability actually mean in the eyes of HMRC and where would the line be drawn in terms of responsibility, liability or penalties? 

Probably the most divisive change that HMRC proposed was the requirement for companies to notify them in advance if they are planning to make an R&D tax relief claim as it appears to contradict the concept of an uncertainty, hinder startups and is overall incompatible with a company’s statutory right to amend their return. To properly unpack all these concepts, we decided to dedicate a separate blog post to it, which you can read here.

What are the next steps?

The government is encouraging stakeholders to share their views on the proposed changes. They will then publish a draft legislation in the summer of 2022. The draft legislation will then be subject to further debate, before the final changes are included in the 2022-23 Finance Bill. Any eventual changes to the R&D Tax Relief scheme will therefore take effect from April 2023.

R&d tax relief, research and development tax relief

Why you should not leave your research and development tax relief claim to the last minute

last minute R&D tax relief, tax relief, randd tax relief software

To understand why you shouldn’t leave your R&D tax relief claim to the last minute, let’s consider the following example. Robert is a busy entrepreneur who is responsible for his business’ financial success. Robert has heard about research and development tax relief previously but never had the time to fully investigate the possibility of claiming. Although he did know that claiming can help by providing additional cash flow it was never on his priority list to pursue a claim. So what are some things that happen when you delay your claim?

By delaying your claim, you are also delaying your benefit.

The first and most simple point, you are delaying your benefit.

How to submit an R&D claim?

All limited companies have the statutory right to amend their corporation tax returns retrospectively up to two years past the relevant accounting period year end date. This date is the statutory deadline for submitting a research and development claim. The R&D claim is submitted via the corporation tax return form (CT600) by filling out the relevant boxes and attaching the technical narrative PDF as proof of the R&D work carried out.

What are the requirements for submitting a claim?

Before the research and development claim can be submitted, the CT600 has to be prepared. Before the CT600 can be completed the company needs to finalise its statutory accounts as the numbers from the accounts plug in to the CT600.

Delayed preparation and or completion of company accounts and CT600 form are one of the top causes of delay during the R&D claiming process, followed by people answering the necessary questions for the technical narrative of the R&D projects. Ideally, try to avoid having to rush making your R&D tax relief claim as, firstly, it’s stressful, secondly, it doesn’t allow enough time for a thorough R&D cost and narrative evaluation. This could lead to mistakes or certain R&D projects falling through the cracks.

The narrative provides proof of the type and level of research and development activity within the business. Although gathering information and turning this into a good technical narrative takes time and should also be accounted for in the context of submitting a timely R&D claim, if you are recording your R&D as you go along in Novel, this significantly speeds up the process.

Best time to submit a claim

In short, you can submit as soon as all the above required pieces are finalised. It is worth mentioning, that there are certain times throughout the year that are extremely busy for HMRC. Where possible to submit earlier do try to avoid submitting claims in December and March.

The reason for this is because these dates coincide with the calendar year end and the UK’s tax year end, as a result, HMRC tends to be very busy and it may take longer for them to process your R&D tax relief claim, thus delaying your benefit.

Real time tracking of R&D

There are numerous good reasons for tracking the R&D work in real time but one of the most important ones is that it facilitates an expedient delivery of the technical narrative. By keeping track and noting down R&D activity on the go, you are recording more accurate information and are able to go into more detail as it is fresh in your memory. When it comes to writing up the technical narrative at the end of the year, all that is required is editing what is already there without worrying whether any qualifying work has been left out.

Do your next R&D tax relief claim with Novel

Overall, we highly recommend making a timely submission as this can greatly impact your cash flow and support all aspects of your business. You can generate HMRC-compliant R&D tax relief claims without the complexity quickly and efficiently as well as take advantage of a suite of features: education content, financial aggregators and record ongoing R&D all within Novel.

Preparing R&D tax relief claims hasn’t been easier. 

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cloud, cloud computing, RD tax relief software, Novel

Can I claim my cloud and data costs in my R&D claim?

Our clients often ask if they can claim their cloud computing or data costs, and up to now the answer has disappointingly been no. But this has finally changed with the government’s announced update to the qualifying expenditure rules, allowing innovators to claim for the cloud computing that enables their work, and the data that powers their projects. 

Cloud computing has become vital for many businesses, in tasks such as hosting web applications or training machine learning models, and data is feeding the machine learning models used in many industries. Expensive data has also found applications in fields as diverse as high-fidelity digital twins for cities, modelling wind loads on skyscrapers in wind tunnels, and functional genomics. 

cloud, cloud computing, RD tax relief software, Novel

What were the rules before? 

Prior to the recent announcement, companies have been able to claim for their software and consumables costs. But due to data and cloud computing hardware not being  ‘consumed’ during a project or classed as software, these costs have been excluded from the claimable cost categories. This oversight has left the U.K. lagging behind other nations in providing funding for the industries which use data and cloud computing heavily in their R&D; notably in Artificial Intelligence (AI) and BioTechnology.

The definition of software costs in particular has become increasingly outdated, with current legislation designed for a world where software was installed on physical floppy disks and was tied to a single purchase. Modern software is typically downloaded directly from the internet, or accessed remotely through a web application, typically paid via a subscription. This Software as a Service (SaaS) model is treated ambiguously in the legislation, with many clients feeling unable to claim for software that is vital for their R&D projects. 

Further complicating the software rules is the rise of Infrastructure as a Service (IaaS)— where users rent servers for compute and storage in the cloud—which does not fall neatly into the category of hardware or software. HMRC’s recent announcement seeks to address this problem by enabling some cloud computing costs to be claimable for R&D relief. 

What costs will be claimable after the changes? 

The exact details of the qualifying data and cloud costs are yet to be revealed, but HMRC’s published consultation on the subject highlights several examples when data cost may be claimed: 

  • Data acquisition
  • Data cleaning and manipulation
  • Data storage—tied to cloud costs.
  • Cloud costs for training machine learning models
  • Cloud costs used in development phases of software project

Datasets vary in their cost of acquisition, with many being publicly available for free, or can require specialist providers such as in genomics where data is collected from expensive medical samples. The feedback received from HMRC’s consultation on qualifying expenditure suggests that data acquisition costs are likely to be included as a qualifying expenditure, to the extent to which it is part of a larger R&D project.  

Often the acquired data is unusable in its raw format, requiring significant resources to transform and clean the data into a format appropriate for the task. HMRC has given little indication of whether the costs associated with this task will qualify—although we would argue that processing data is essential for the R&D project to succeed, and would therefore qualify as an ‘indirectly’ qualifying activity. To learn more about indirectly and directly qualifying activity in a research and development project, click here.

We expect that once an R&D software project has been completed and a commercial product produced, the continuing cloud costs associated with hosting the web platform or storing data will no longer be claimable. Here it will be important to make a distinction between the development phases of a project and the deployment phase—a distinction that does not mesh well with the modern Continuous Integration, Continuous Deployment (CI/CD) method of software development. 

Data can be acquired by businesses in several ways, affecting how the costs might be classified. For example a company may set out to gather data themselves, thus incurring a staff cost. Or the company may contract another company to gather the required data, classifying it as a subcontractor cost. HMRC’s consultation also highlighted that a company may also pay for data under a licensing agreement, which enables them to use the data for the specific purpose outlined in the project, after which the data may be deemed as consumed—leading it to be classified as a consumable. In the end, the inclusion of data as a allowable cost may require a new cost category, or an update to the ‘consumables’ or ‘software’ category, to catch the various methods companies may use to acquire data.

Potential Pitfalls and Considerations 

The addition of cloud computing to the categories of qualifying expenditure does raise some new questions about the lack of inclusion for non-cloud hardware costs, such as the installation of a company’s own hardware for hosting data or running computations. Whilst capital expenditure does not attract R&D tax relief, there are other incentives on offer such as the recently announced Super Deduction which we expect hardware costs to qualify for.

Datasets that are purchased outright are less simple to classify into existing cost categories, as the data is generally still available for use again after being used, although it may lose much of its utility if the data is time-sensitive. This may require HMRC to deploy a new cost category, rather than shoehorning data costs into the existing cost categories.

The update to the qualifying expenditure rules for cloud and data costs is a significant win for many UK businesses. Although this revision is the correct step forward to ensure that the incentive reflects modern R&D processes, we are still waiting for draft legislation—expected in the 2022-23 Finance Bill—to confirm many implementation details that will determine the success of the proposed update. The changes are expected to take effect from April 2023 and we will continue to update our guidance as more information is published. 

What’s the difference between a commercial project and an R&D project?

To help you decide whether your project qualifies for R&D tax relief, it can be helpful to think about the distinction between a commercial project and an R&D project. Generally speaking, a commercial project is defined at a higher level and encompasses the whole commercial journey from start to finish, whereas an R&D project is a subset of activities that focuses only on resolving the challenging scientific or technological aspects of the commercial project. This also means that just because something is commercially innovative; it doesn’t necessarily qualify for R&D tax relief.

Why is this important?

 

The purpose of writing the supporting technical narrative is to detail the activities that make up an R&D project. A common mistake is to focus on the commercial project by centering discussions around commercial or business aims and commercial uncertainties. Doing this dilutes the technical narrative with non-qualifying activities and it can even weaken the claim in the face of a HMRC enquiry. This is often the case where key indicators of an R&D project aren’t clearly explained or split out.

However, this doesn’t mean the overarching commercial project shouldn’t be mentioned at all. The commercial aim is ultimately what drives the R&D activity and provides important context as to why the R&D project has come about.

 

Within Novel, when creating a Project, there are fields where you can add the associated Technological/Scientific Uncertainty, Commercial Aim, Advancement Sought and Baseline Knowledge. You will notice that you can add multiple activities but only one uncertainty per project. This ensures that the focus is on compartmentalising a commercial project into the various R&D project(s), rather than allowing for the one project with many uncertainties which may ultimately blur the line between that of a commercial project and that of an R&D project.

Where do we draw the line?

 

An R&D project can be distinguished by considering what type of activities are taking place. Certain activities simply aren’t regarded as R&D as they do not relate to any scientific or technological aspect of the project. For example, commercially necessary but non-R&D activities include:  

·   competitor research and analysis

·   supply chain & procurement management

·   production & logistics

·   marketing & sales

For this reason, in Novel, when Creating an Activity, we have a specific list of Activity Types, which are most commonly featured in R&D projects and claims. If this list doesn’t include your activity which you believe goes towards resolving technological or scientific uncertainty, you still have the option to select Other and specify the work in detail.

commercial, randd, research and development, novel

What are the boundaries for R&D?

 

 

R&D starts when a scientific or technological uncertainty is identified and continues until the uncertainty is resolved, or when work aimed at resolving the uncertainty ceases. This work is often referred to as an ‘activity’ and during an R&D project there are two qualifying types of activity:

·   directly contributing activities; and

·   indirectly contributing activities.

Direct or indirect?

 

 

Directly contributing activities are all activities that directly contribute to the resolution of technological or scientific uncertainty. This work is often carried out by those who have hands-on experience with the technology or science at the business, such as engineers, developers and scientists.

Indirectly contributing activities include a multitude of activities which go towards supporting the above directly qualifying activities. A full list can be found within paragraph 31 of the BIS guidelines, though to name a few this includes: feasibility research, HR and Finance support, maintenance of R&D equipment and premises, scientific or technological administration. Note, these activities are only relevant insofar as they support directly qualifying activities, rather than the business as a whole.

Want some more information?

 

 

The Novel platform contains many educational pieces which are designed to inform and educate the user on what projects and activities qualify. If you have any questions, either about the educational content or something we haven’t covered, feel free to contact support via Intercom and we will be happy to help.

 

Do your next R&D tax relief claim with Novel.

Connected party blog

What is the impact of ‘connected party’ rules on subcontractors and externally provided workers when claiming R&D tax relief

connected party, randd, apportionment, subcontractor, EPW

One of the most generous aspects of the SME R&D tax relief claim is that companies can claim for subcontractor costs and externally provided workers (EPWs), commonly known as agency workers. However, claimant companies, especially SMEs, often find themselves dealing with ‘connected party’ rules.

There are a number of ways that two businesses may be regarded as connected parties. The most common way is that the claimant company either owns or is owned by another company. Another time connected parties rules apply is when there is a family relationship, such as businesses involving parents, siblings and children. In this article, we will give a brief overview of what subcontractors and EPWs mean, and we will discuss how the connected party rules may impact your claim.

Difference between subcontractors and EPWs

When it comes to undertaking innovation research and development, companies will often outsource work to other businesses that may have either the expertise or the equipment necessary to progress with a particular aspect of the project. Whatever the reason may be, for the purposes of R&D tax relief, it is important to ascertain the nature of the relationship between the claimant business and the subcontractors or EPWs in order to ensure that the costs are eligible to be claimed. But before we dive into that topic, let’s discuss the difference between the two types of worker.

Subcontractor relationshipExternally provided worker relationship
– Typically undertake work on their own terms as experts in the field.

– Have their own methods of working and work towards deliverables.

– The task that is subcontracted out is the responsibility of the business and not a particular individual.

– Work with a high level of autonomy, as long as projects or tasks meet deadlines, the subcontractor is free to manage themselves.

– Subcontractors tend not to take on the economic risk of the project. For example, say a discovery project goes ahead, subcontractors are paid to get the project done even if it ends up being not commercially viable for the claimant company.
– A specific person is brought into the claimant business as an additional resource but is not on the business’s payroll, instead they are paid via a third party, such as a staffing agency.

– The individual usually works at the premises of the business in question alongside the team undertaking the R&D, relying on the equipment provided by the business.

– EPWs are often paid for a particular amount of time (e.g. hourly, daily or monthly rates).




Dealing with subcontractor and EPW costs within the R&D tax relief claim

Unlike staff costs, where you can claim 100% of the staff costs that are relevant to the R&D project, for subcontractors and EPW you can only claim 65% of the relevant costs, unless they are deemed to be ‘connected’, which we will discuss in more detail in the section below. For these cost categories, the legislation reduces the claimable amount to 65% of the costs, so as to exclude any profit margin the third-party may be making on their services. We presume that the intention is to encourage businesses to carry out R&D work in-house rather than subcontracting it. 

If you’re inputting information about your subcontractors and EPWs into Novel, the system’s auto financial apportionment function will apportion the costs to meet HMRC requirements automatically.

For example, we highlighted above that only 65% of subcontractor costs are eligible for R&D tax relief. Let’s imagine that we paid Enterprise Z £100,000 (ex VAT) for their services and they spent 100% of their time working on our R&D project. 

When we go into Novel, we will insert the price as £100,000 and the apportionment as 100%. Novel will automatically apportion the financial information you add. In the financial overview section, you will see the relevant expenditures for your R&D claim, which is £65,000 or 65% of the costs incurred, as demonstrated in Image 1 and 2. Therefore, the system will allow you to see and understand your Total R&D expenditure alongside what you are eligible to claim as tax relief.

Image 1
Image 2

However, the 65% restriction does not apply when you are connected to your subcontractor or EPW. This is why you see there is a little tick box in Image 1 to establish whether the costs you are including are from a ‘connected party’. 

What changes when subcontractors and EPWs are deemed a ‘connected party’?

For example, Business Seed owns Enterprise Z and enlists them to create a prototype for a bespoke commercial building design. This situation would be classed as a connected party because Business Seed owns Enterprise Z.

When you are dealing with subcontractors or EPW R&D costs of a connected party, you may be able to claim more or less than 65% depending on what actual costs were incurred by the service providers. The claiming company can only claim R&D tax relief on the lower of:

  1. The payment it makes to the subcontractor or EPW
  2. The costs incurred by subcontractor or staff provider

For part 1, payment amounts should be easily ascertained by the claimant company from its own accounting records. Part 2 requires access to the subcontractor/EPW’s accounting records. To ascertain the costs incurred by the subcontractor/EPW (known as the “relevant expenditure”), the claimant company will need to calculate the sum of the following:

  • Staff costs (including gross salaries and wages, bonuses, employer’s national insurance contributions and pension contributions)
  • Consumable items
  • Software costs
  • Clinical trial volunteers

Let’s take our previous example to outline the above. Business Seed paid £100k to Enterprise Z for their bespoke building mockups, but Enterprise Z’s costs for delivering the mockups were only £75k. Assuming that the full £75k was relevant expenditure, then Business Seed can claim the full £75k as R&D relief as it’s the lower of the two. Where it is established that the parties are connected, no 65% apportionment is required. 

Therefore, to account for the ‘connected party’ rules within Novel, we’ve included a ‘connected’ tick box, which effectively will tell Novel not to apply the 65% apportionment. Instead, you will need to ensure that the costs are based on the categories listed above rather than invoice values including any markup. 

If the parties are unconnected but you’re privy to the actual costs incurred in providing the R&D work, it’s worthwhile exploring whether electing to be connected is a worthwhile step to take. For example, if you’re engaging with a subcontractor who is open about their profit margin, which is, say, 20%, this is less than the unconnected restriction (35%) and it’s therefore beneficial to make an election, assuming both parties are happy. This will maximise the value of your claim.

For example, what if Business Seed decided to go another way and not enlist Enterprise Z for their mockups but instead use Cheap Designs Ltd, who also charge £100k for their service. However, their profit margin is much lower than Enterprise Z, notably their costs were £90k to deliver the design. As the profit margin was only 10% of the initial cost and is less than the unconnected restriction (35%), it would be more beneficial for Business Seed to elect to be considered as being ‘connected’ to Cheap Designs Ltd, as this would yield a bigger benefit.

In Novel, this would look like Img 3. By checking the ‘Connected?’ tick box, you will be able to edit the ‘Relevant Expenditure’ field to match what was the actual cost of the work as opposed to having the automatic 65% apportionment.

Image 3

A word of caution: although choosing to be treated as elected companies may be beneficial for you, make sure to stipulate the time scale of how long you wish to be treated as ‘connected’. If you don’t do this, for the purposes of R&D tax relief, you will be treated as ‘connected parties’ for all payments under the same contract or arrangement. We suggest that the timescale you chose corresponds to your accounting periods and is supported by a contract with a predetermined end point. 

Do your next R&D tax relief claim with Novel

The world of R&D tax relief can be daunting, which is why we created Novel. Full of educational pieces and intuitive features, Novel will help you generate HMRC-compliant R&D tax relief claims, quickly and efficiently in-house. Also, if you need any help along the way, you can reach out to our team of qualified R&D tax experts who will guide you along the way.

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sustainability and research and development blog post

On the Economics of R&D, Sustainability, and Planting Trees in Whose Shade You’ll Never Sit

sustainability-Research-and-development-tax-relief
Nikolai Bogatov, A Beekeeper, 1875

The appearance of sustainability and greenness is important to businesses. From petrochemicals to probiotics, modern publicity campaigns seem incomplete without a diverse gallery of smiling people. All living in the moment, surrounded by nature, and blessed with eternal sunshine.

It’s no coincidence either. We’re suckers for emotional arguments, and that’s part of what makes us human. Whichever way you slice it, we are far less rational than we like to think – and the green‑washers know it.

But being green is inherently greater than just appearing green, and research and development (R&D) tax reliefs are designed to reward those companies who are helping to improve the way in which we co-exist with the natural world. Activities that contribute to improving the efficiency and sustainability of existing processes can qualify for tax relief under the research and development scheme. We’ve put some examples at the bottom of this blogpost, but to understand why and to properly deconstruct the blog’s title for its aphoristic value, we want to introduce you to an interesting economic concept: the externality.

Cool, so what is an externality?

In a nutshell, an externality is a cost or benefit that is imposed on a third party who did not agree to incur that cost or benefit. ‘Costs’ to the third party are called negative externalities, and benefits are termed positive externalities.

Imagine you’re a crop farmer, and your neighbour invests in an apiary. You don’t pay for the bees, and you don’t pay for their upkeep, but you benefit because the neighbour’s bees pollinate your crops and increase your crop yields. Ka-ching! That’s a positive externality.

Alternatively, imagine you’re embarking on a much-needed mini-break. You’ve bagged yourself a bargain on Skyscanner and you’re flying Malaga-return for £50, good for you! Also, the airline is covering its fixed costs on a seat that would otherwise have gone empty, so that’s great for them too.

Both parties directly involved in the transaction are happy. You do feel a little guilty that the carbon-footprint of your jet-setting lifestyle contributes to the developing climate crisis – but why should you pass up this opportunity that you’ve been gifted? Anyway, the scientists of tomorrow will come up with a solution when we really need it, and you’ll probably be long gone by then anyway. Just like that, you’ve imposed a significant negative externality on people who don’t even exist yet.

This is an example of what economists call a market failure, in which individuals pursue the outcome that is best for themselves individually, but which leads to suboptimal, bad, or even disastrous outcomes from a societal perspective. Adam Smith’s metaphor of the invisible hand explains how individuals’ selfish pursuit of their own interest can lead to societal benefit. This is the great wonder of capitalism. Smith knew however, that the invisible hand’s anthropogenic nature made it characteristic of some distinctly human foibles. That’s a fancy way of saying that human imperfections make the invisible hand clumsy.

sustainability, research and development, travel

OK, that’s all well and good. But what does any of this have to do with sustainability?

Well, when it comes to incentivising more positive practices and fewer negative ones, forcing the costs or benefits of the externality to be reflected in the initial transactions is one solution. This internalisation means that the cost or benefit of the externality is considered in the original transaction.

Maybe there’d be fewer flights if flying was taxed more heavily, and maybe the tax revenue could be used to incentivise research on greener flight technology? Maybe your neighbours in the first example would have installed the apiary sooner if they knew you’d be willing to subsidise some of the cost, if there was a fund to support such communally beneficial activities, or if keeping bees attracted tax-benefits. See where we’re going with this?

There is a problem with all of these interventions though, which is that every newfangled measure has the potential to introduce more administrative complexity. Before you know it, you’re operating in an acronym-laden tax and policy environment that’s about as viscous, opaque, and sensical as a bowlful of alphabetti spaghetti. The pace of innovation is inevitably slowed if firms competing to survive are forced to invest significant amounts of time in a bureaucratically complex arms race, rather than innovating, for a strategic advantage. Where you draw the line on what constitutes the right level of market-modulation is subjective by definition (it’s where you draw the line), but it’s hard to argue that incentivising societally beneficial practices isn’t of virtue.

Enter: Research and Development Tax Reliefs

Companies undertaking research and development generate positive externalities which they are not themselves going to capture the value of. These externalities are general advances in understanding or ability, which have a general tendency to be combined and built on by others in unforeseen ways. From a scientific and technological perspective, this principle has been understood for centuries. Isaac Newton claimed to have seen further if only because he was “standing on the shoulders of giants”, and the iPhone owes its existence to billions of dollars’ worth of state-funded military research. It’s a well-established societal perk of R&D activity, but one that doesn’t inform the investment decision from a corporate finance perspective; Apple probably wouldn’t have invested in pressing the smartphone revolution if the smartphone’s technological foundations weren’t already in existence. The research and development schemes are designed to link the wider societal benefits of undertaking R&D to the initial financial investment decision, so optimising the level of investment in scientific and technological advancement.

sustainability, renewable energy, novel, software

Sustainability

We’ve touched on this already, but there is huge value in preserving the ecological health of our local and global communities. There are also huge costs to getting it wrong. That’s why the costs incurred in advancing science or technology, specifically where these relate to the sustainable refinement or alteration of existing processes to make them more efficient and ecologically friendly, are included in the scheme. If you’re innovating to find new ways of reducing the negative externalities imposed on the planet, HMRC will internalise some of that benefit to you in the form of tax reliefs or credits. Examples of qualifying activities include:

  • Developing alternative packaging that is more ecologically sustainable. This might include research to develop new bioplastics or the technical development of new bioplastic products.
  • Finding new ways to reduce the amount of water or energy used in a process.
  • Finding ways to reduce pollution and environmental contamination with new capture methods for hazardous chemicals or processes that use fewer or less ecologically harmful chemicals.
  • Developing new recycling processes and technologies, such as AI-enabled recycling sorters.
  • Expanding what we know about bees, practical apiculture, and combating colony collapse disorder.

It’s clear that R&D tax reliefs are important, and there is great societal value to their existence. Whilst they are an often-misunderstood part of the tax system, we’ve witnessed significant advances in the industry in recent years which make it easier for companies to understand how they can benefit from such schemes. But we wanted to do more, and that’s why we created Novel – a digital platform designed to help people claim R&D relief as simply as possible. This means you can start claiming relief on your qualifying costs right away and plough more back into the work that really matters.

You won’t need an R&D consultant to use Novel, although our team is always on hand for support or advice should you need it.

Are you a tech business? Then you should be claiming back your development costs.

Are you claiming back up to 33% of your development costs? 

It’s a shame when brilliant ideas are left in limbo before they are able to come alive because of financial constraints. Did you know that most founders underestimate how much time their startup will need to achieve market validation by 2-3 times? What if one of these businesses runs out of money before anything viable can be completed, then this means that many great ideas are never given the chance they deserve. How many businesses could have succeeded if they had more time and money?

When releasing a product to the market it can take longer than expected before the businesses get the desired return on investment, which can inflate the risk of running out of money. This is why startup success is closely linked to its ability to raise funds. To avoid this from happening, startups should take advantage of the beneficial tax relief schemes that are available.

Research and Development (R&D) tax relief is a valuable government initiative that helps alleviate some of the financial concerns associated with trying to get a tech startup off the ground. Yet, it is also one of the most overlooked sources of financing for a startup. 

This relief is designed to encourage and reward companies that seek to advance the overall knowledge in a field by resolving scientific or technological uncertainties. The most important factor here is that the work that you do has to be innovative. How does this look?

For a tech business this could look like this:

  • Are you developing new products/processes?
  • Are you trying to improve or extend existing products/processes?
  • Are you trying to get different systems to talk to each other?

For more examples, click here.

Innovative companies can claim between 19% and 33% of their R&D costs back as a cash credit or use it to reduce their corporation tax liability. With the first few years of a company’s life spent with significant overhead and development costs, by claiming R&D tax relief, you can potentially get back 100% of your developers salary as a relief.

It doesn’t matter whether you are a loss-making business,at the prototyping stage or development stage as long as your business is working on technological or scientific uncertainty and pushing the boundaries of available knowledge in your field, you can claim tax relief or surrender the losses incurred for a cash payment.

business, tech business, research and development, novel

How can you claim R&D tax relief?

R&D tax credits are a type of Corporation Tax relief; therefore, it’s tied to your accounting period. You should be on the lookout for any expenses and begin recording the work that could potentially qualify for a tax deduction, especially if you are close to filing your Corporation Tax Return (CT Return). This will help create strong supporting documentation to be submitted to HMRC. 

If you’ve already filed your CT Return, don’t worry, you won’t miss out on the relief. The deadline to claim R&D tax relief retrospectively is 24 months from the end of your accounting period.

What will you need?

To support your R&D tax relief claim, you need to submit a technical narrative outlining why the work qualifies for the relief and the calculations that adhere to HMRC’s requirements. The process may sound difficult but with correct tools it isn’t and is definitely worth it! As a startup, there is one main thing you can start doing today to help you create concise, compliant claims?

The best way to make sure you have all the evidence necessary for your technical narrative is by keeping a detailed record of every project throughout the R&D process and who was involved. This will ensure that when it comes time to writing up your report, you’ll be able to easily recall what went into each project and provide HMRC with everything they need as proof that the work qualifies.

Think you qualify?

There are two primary ways you can go about making the claim. You can hire an R&D tax relief consultancy firm, such as Optimal Compliance, (psst shameless plug because OC created Novel) that will do the whole process of creating the claim for you, such as talking to the staff to understand the types of projects you do and writing the technical narrative, including all the required financial calculations.

Or, if you prefer to do your R&D tax relief claims in house and have full autonomy, you can use Novel to helps you create the technical narrative from start to finish, including the financial information. If your accounting year end isn’t up yet, you can also use Novel to track your R&D in real time so when it comes to making the claim, all the information is already within the system and you’re more than halfway to submitting your claim.

Whichever option you choose, claiming R&D tax relief can be extremely beneficial for your tech startup. It will help ease your cash flow problems and provide extra time to work on your business offerings or even revolutionise the way you work going forward. 

Research and development, R&D, technologies

Research and development – What is it, and how can it benefit you?

Research and development, or R&D for short, is the field of the advancement of knowledge that a private or public sector organisation may undertake, in order to develop or create new products, processes or services, or to improve upon those already offered. In other words, R&D, as a concept, represents the pursuit of innovation within the context of business. Research and development is often carried out by a separate section of employees within a company, and generally is not an activity performed with the expectation of immediate profit, but rather with the hope of an eventual payoff further down the road, and with the long-term profitability of a company in mind.

Research and development can be thought of as a cycle, with a constant study of the efficacy and efficiency of a company’s existing products and services leading to new ideas and experimentation, followed by research and more in-depth exploration of new ideas and potential products, to the eventual design and testing of new products. And then the cycle completes or repeats with the continuing study of the newly created product’s efficacy and efficiency, suitability, desirability among customers and performance in the market. This research and development cycle is often the earliest stage of the development for new products and services, and as such, is inherently risky as the outcomes are uncertain – there may be uncertainties around whether a new development is technologically or economically feasible, or even possible, or more commonly, whether the research and development will result in meaningful gains for the company, whether through new or improved products and services, valuable intellectual property or patents.

goggles, chemist, researcher

However, while investing in research and development does carry some inherent risk, a company not investing in research and development is guaranteed to not come up with new knowledge, new products and services, intellectual property and patents – and there is every chance that a company that doesn’t invest in research and development will stagnate and fall behind, especially in this increasingly globalised and knowledge based commercial world, as competitors seek to increase their own market share, often at the expense of the company that didn’t invest enough in R & D.

Saving money on R & D in the short term can end up costing businesses severely in the longer term, as they become increasingly irrelevant and their previous customers move onto new products and services that are either better, or offer better value for money. R&D is more important in some industries than others; technology such as computer hardware, semiconductors or telecommunications equipment, pharmaceuticals and life sciences such as biotechnology, are particularly reliant on R&D, or “R&D intensive”, while software, construction and engineering, manufacturing, the automotive, aerospace and defence industries are also heavily reliant on research and development, as well as, to a lesser degree, food and drink industries. Whatever the industry though, the world does not stand still, and other companies will no doubt be attempting to follow the example of an already successful competitor, and to improve on their pre-existing solutions, to take their market share from them.

R&D generally falls into one of two categories; basic research, which is more general in its aims, and is about building knowledge and understanding that a business may use to its advantage, and can be the foundation of further research (and development) projects, and provide context and analysis to help with a business’ strategic decisions. The second category is “applied research” – this has more defined goals, often looking to achieve a specific objective, and often leads directly to the development of a product. It can also look at reaching new markets, cutting costs, improving safety or making use of available new technologies.

Companies fall behind or fail completely for many reasons, and it can be difficult to apportion blame in the aftermath of a business’ collapse, but failure to adequately fund research and development can often be a contributing factor in the demise of a company. It’s impossible to say whether for example, if the former Blockbuster CEO John Antioco had chosen to invest more in R&D, that they could have fought off competition from the likes of Netflix and remained competitive and relevant in the era of digital downloads and streaming services such as Netflix and Apple TV. Nor is it possible to say whether retailers such as BHS or Woolworths could have retained a space in the increasingly internet dominated retail market if they had spent more on R&D.

However, you only have to look at the companies which have the largest budgets for research and development to see some very familiar, household names, market leaders in their respective fields, proving that these industry leaders of today, experts in the creation of wealth, clearly value research and development, dedicating often tens of billions of dollars annually to the pursuit of new knowledge and new, improved products and services, in the hope of remaining competitive and relevant, in the cut-throat world we live in. Amongst the biggest spending companies worldwide, according to the 2018 EU Industrial R&D Investment Scoreboard, are South Korean tech behemoth Samsung at number one and Google parent company Alphabet at number two, while Volkswagen, the largest car manufacturer in the world, ranks third, and tech companies Microsoft, Huawei, Intel and Apple all rank within the top ten. As well as technology and automotive companies, pharmaceutical companies feature highly in the list of companies spending the most on R&D, for example the two Swiss giants Roche and Novartis, German multinational Merck and American “big pharma” corporations Johnson & Johnson and Pfizer.

There is certainly a correlation between the highest performing companies and the amount that they spend on R&D, but, do the highest performing companies hold their positions because of the large amounts of capital they dedicate to investment in R&D, or are they able to dedicate the large amounts of money to R&D that they do because of their leading position in the market? The answer is probably a little bit of both; companies such as Apple and Google are well known for having ploughed money into R&D, and for having made major market gains as a result, as well as a few relative failures. However, the runaway success of the iPod, which set the stage for the iPhone, the App Store and the Apple we know today, was to a large extent a matter of Apple being lucky to have the right product at the right time. Had the iPod been released a few years prior, it could have been an absolute failure, and Apple as we know it today might never have even existed. As it happens, the iPod was a roaring success, and paved the way for the even more successful iPhone as well as the iPad, not to mention the Apple software ecosystem, with iTunes providing an early example of success by Apple in the software and online retail sector.  

alternative, blade, electricity

Research and development can gain a company intellectual property and patents, as well as allowing them to remain competitive in the market by creating actual new products or services for their customers, or becoming more efficient at producing or providing the products or services that they already offer, again, helping them to remain competitive and to hold onto a place in the market. The intellectual property and patents gained from research and development can become highly valuable in and of themselves, and provide a secondary source of income, often from competitors wishing to make use of technologies and developments made by the company holding the patent. The mobile phone market is infamous for its interconnected spider webs of patent claims made between the various manufacturers, often highly fought over in court.

It can be all too easy for a company to fall behind in the area of research and development; an already profitable business may be averse to spending money on something that will not provide immediate gain to the company, and may feel confident enough in their business and believe that they are still providing their customers with what they want. There are indeed highly successful companies that spend little on R&D, Walmart being but one example. Walmart provides a service that technology and the internet can only offer so much in competition; people will always value having a bricks and mortar store to shop from. Even as they take advantage of the convenience that online retailers offer, a bricks and mortar store offers its own conveniences and that is unlikely to change anytime soon, Covid-19 pandemic notwithstanding. Certain industries are less R&D intensive, particularly state-owned enterprises such as Russia’s Gazprom or Malaysia’s Petronas, although renewable energies are a notable exception. Opening a traditional chain of fried chicken shops may provide immediate revenue, but investing in a more “R&D intensive” business should provide greater good to society, as well as far greater potential for long-term profit.

R&D spending by country

In terms of countries that spend the most on R&D, China and the US top the list with each spending over half a trillion dollars annually, while the United Kingdom sits at number eight in raw spending (figures from Wikipedia), behind countries such as Japan, Germany, South Korea, Brazil and India, and spending $44.8 billion annually, or 1.7% of the UK’s GDP, around £700 per capita. Predictably, the list of nations that spend the most on R&D looks remarkably similar to a list of the largest economies; a better metric is perhaps the percentage of its GDP that a nation dedicates to R&D spending. Again, from Wikipedia, figures show that Israel tops the world with 4.9% of GDP spent on research and development, followed by South Korea with 4.29%, and Finland, Sweden, Japan, Austria, Taiwan and Denmark each spending above 3% of their respective GDP on R&D. The UK ranks 21st worldwide with just 1.7% of our GDP spent on research and development, behind countries such as Switzerland, Germany, the United States, China, Belgium, Slovenia, Czechia, Singapore and Australia. Israel’s high spending can be attributed to both a highly educated population, and a necessarily large domestic defence spending (and necessity being the mother of invention, as they say) second only to Saudi Arabia, with 5.3% spent on defence according to figures from the Stockholm International Peace Research Institute, resulting from the nation being in a near constant state of war with its largely hostile neighbours since it declared independence in 1948, although Israel is also known for its technology sector including a healthy culture of tech start-ups. This includes a large number of cybersecurity companies, again in large part due to its status as one of the most embattled countries on earth, surrounded by hostile neighbouring states. Second to Israel in R&D spending as a percentage of its GDP, South Korea’s foreign relations are also defined by its relationship with hostile neighbours – or in this instance a single hostile neighbour – in the form of its northern cousin the DPRK, or North Korea, run by belligerent dictator Kim Jong-un. However, whilst South Korea does have a decently sized defence sector, and spends a relatively high 2.7% of its gross domestic product on its military, the bulk of South Korea’s R&D spending goes to its huge tech sector, as well as its similarly huge automotive sector; Samsung, Hyundai, LG and Kia being some of South Korea’s most well-known and successful companies, and operating in sectors heavily reliant on R & D spending. Whilst often held up as a paragon of free market economics, South Korea’s economic success and rapid growth since the sixties was actually the result of both free market and state interventionist policies, with the “chaebols” – literally “rich families” – a uniquely South Korean term referring to its huge corporations such as the aforementioned Samsung, Hyundai, LG and Kia, benefiting from state subsidies and tax breaks, something we will look into in the context of the UK later.

Other countries high up on the list of R&D spenders include Germany, Japan, the US, China and Taiwan, as well as, notably, the Nordic countries, among other European nations – Finland, Sweden, Denmark, Austria and Belgium being high spenders. While it’s clear that such richer countries, like the aforementioned Finland, Sweden, or Switzerland, have the obvious luxury of easily being able to afford to spend more on R&D, research and development itself should certainly not be seen as a luxury, rather an important and necessary investment to secure the long-term economic competitiveness and economic health of both a company and the economy of a country, and society as a whole.    

Society as a whole

R&D benefits not just the investing company, but the economy as a whole and wider society – for example, lifesaving or life-improving new medical treatments, or instant, mobile access to encyclopaedia-quality articles and knowledge, something that would have required at the least a trip to the library just a couple of decades ago. Technologies that make our lives easier, more healthy, or happier even; whether by reducing arduous labour, allowing easier and better quality long-distance communication between loved ones, reducing the burden of medical conditions, or allowing the attainment of greater knowledge at the touch of a button are a real benefit to humankind that investment in R&D has made possible, and that would not have been possible had companies only been looking for immediate profit.

At the company level, greater investment in R&D often provides a company with the knowledge it needs to remain competitive in the global market. This further benefits society by providing jobs, and also providing extra tax revenue to the government to spend on healthcare, social security, education and the general wellbeing of the nation as a whole.

With these benefits in mind, governments, including our own in the UK, often provide incentives in the form of tax relief or tax credits, to encourage companies to invest in the not immediately profitable R&D. Incentives can even be claimed on projects that end up failing, so the government (or taxpayer) effectively shares some of the risk with the company doing the R&D. From the UK government’s website: “Research and Development (R&D) reliefs support companies that work on innovative projects in science and technology. It can be claimed by a range of companies that seek to research or develop an advance in their field. It can even be claimed on unsuccessful projects.”

We will look in more detail at the tax incentives offered by the UK government in a further article, and further information about the benefits of R&D tax reliefs can be found on our website in the industry section or for a general overview, click here.

research and development, technologies

R&D in focus: Five new technologies coming of age this decade

What fuels research and development (R&D)? Innovation! The sheer act of looking for something new stems from trying to do something better or fix a current problem, what other reason would there be to develop anything new or do any further research? We’ve written an article below of five new technologies coming of age this decade.

The internet of things

The Internet of Things (IoT) is a term that refers to the network of increasingly “smart” – or internet connected – everyday objects, often mentioned in relation to the “smart” or automated home; thermostats, refrigerators, security cameras; but with possibilities extending far beyond the home to encompass entire cities or even countries, and entire industries; energy, infrastructure, security, healthcare, transport, manufacturing, agriculture and defence are just a few areas that the Internet of Things has immense potential to provide innovation and improvement. One common application, within the aforementioned concept of the “smart home” is the use of internet connected thermostats and lightbulbs, allowing the consumer greater control over their energy usage, and allowing heating, hot water or lighting for example, to be switched on or off from a smartphone, or, automatically – based on a consumer’s usual routine, without the need for any input from the consumer themselves. An often-used example is a user being able to switch on their heating while on the way home from work.

The concept of the IoT is closely related to the “smart” concept – and encompasses a host of items with inbuilt electronics, sensors or actuators, and most importantly connectivity, allowing for greater – and direct – exchange of data with the wider internet. The use of Smart Meters in homes for water and energy billing is an example of an IoT type of technology already in widespread use in our homes. According to business research firm Gartner, this year the number of connected devices, across all sectors and technologies, exceeded 20 billion. Amazon’s AWS (Amazon Web Services) and Microsoft’s Azure Sphere are two of the main entities currently providing the technology behind this huge and ever growing network of connected devices, and while there are some ethical concerns around privacy and security for example, the technology only looks to grow further.

Artificial Intelligence

Artificial Intelligence allows machines to perform tasks hitherto limited to humans; for example, speech or image recognition. The most recognisable example of an AI application is probably the Virtual Assistant; the likes of Siri from Apple or Alexa from Amazon, or the Google Assistant being fairly commonplace in people’s homes right now. Again though, the impact of Artificial Intelligence is being felt far beyond the home, with applications as varied as medical diagnosis, robotics, electronic trading, transportation, military, healthcare in general, customer services, agriculture, or even music composition!

With the ultimate goal to create computers that can think and communicate as humans do being still relatively far away, the use of applied artificial intelligence will continue to grow into ever more sectors and uses.

Machine Learning

Machine Learning, or ML for short, is a form of data analytics technology, directly related to artificial intelligence, that gives computer systems the power to learn automatically without being explicitly programmed, by using learning algorithms, and building models from ‘training data’ and supervised, unsupervised or ‘reinforced learning’. Having helped play a part in the huge advances made in artificial intelligence over the last few years, ML is a highly significant trend in technology.

The company Nvidia, known primarily for its computer graphics cards popular with gamers and creatives alike, has started using its knowledge in the field of ML, beginning to research how deep learning can teach robots to work alongside humans, supporting their work, by simply observing a person carrying out a task. Computer vision technology, required for applications such as self-driving cars, drones and delivery robots, is currently being developed with the use of ML technology. Facial recognition, with applications in security including bank verification, is a further use, and companies such as Google, Amazon and Facebook are heavily involved in the development of ML technology.

research and development, technologies

Blockchain

Blockchain is a technology that creates a public ledger to permanently, transparently and securely record transactions between two parties; essentially a growing list of verifiable records that, due to its decentralised and peer-to-peer nature, is resistant to modification by any party. Most known for being the technology that enables cryptocurrencies such as Bitcoin and Ethereum to function, blockchain has obvious applications in the financial industry, but its possibilities go much further, including possible applications in cybersecurity, banking – including in third-world countries without a traditional banking infrastructure in place – and management of supply chains; ensuring the safety of foods for example, or tracing the source of rare earth metals used in technology such as smartphones to ensure ethical business practices are observed.

Cybersecurity

All of the previous technologies mentioned will themselves rely on continuous innovation in cybersecurity to in order to remain secure and continue to defend themselves against digital attacks, as the hackers themselves are constantly innovating. Whether accessing or changing personal or sensitive data, extorting money from users or interrupting normal business activity, the threat from hackers is ever on the increase. And as our lives become more and more dependent on technology, and with the number of devices in the world now being greater than the number of people, the need for competent cybersecurity looks only set to increase.

Businesses, governments, regulatory authorities, transport networks and utility companies are all heavily dependent on their computer systems and as such at great risk from hackers and cybercriminals, and with technologies such as self-driving cars or internet-connected medical devices such as a pacemaker, the threat from hackers or other criminals could actually be physically dangerous or even deadly should the security of such a device be compromised.

Some of the big companies involved in IT services including Cisco, Amazon Web Services and Microsoft are becoming more focused on cloud-based security as needs evolve, and blockchain technology looks set to play a bigger role in future cybersecurity provision, with its decentralised nature offering robust protection of data from potential hackers.

Both the stakes and potential gains from investing in new technology are continuing to increase rapidly alongside the pace of development, driving investment and research in the sector, while the new technologies will themselves offer new opportunities for innovation, for example in cybersecurity. The need, and opportunities, to invest in research and development are set to continue to grow, and the UK government offer a number of tax incentives to encourage investment.

If you think you have a qualifying project and want to claim R&D tax relief, try using Novel, our software that helps business claim R&D tax relief. Within the platform, you can listen to tutorials which will steer you through the guidelines and outline what type of work is considered R&D. You can then describe what qualifying work you’re currently undertaking and input your costs.
The best way to understand Novel is to try it, plus we offer the first 3 months FREE.

Do you work for a technology business?

Does your business create different types of technologies? Do you work with any of the technologies mentioned above or something similar? There is a chance you could benefit from claiming R&D tax relief. To learn more about R&D tax relief, visit our page below where we go into detail about claiming R&D tax relief as a technology business, and what type of projects qualify.

R&D tax relief

How R&D tax relief can help alleviate financial strain due to Coronavirus

Can R&D tax relief be a lifeline for your business?

Small and medium-sized enterprises (SMEs) are the lifeblood of the UK’s economy so don’t let the name fool you. According to the Department of Business, Energy and Industrial Strategy (BEIS), 99.9% of the UK’s business population are SMEs, which means large businesses only make up 0.01% of the total business population. SMEs are not just creating more jobs but also drive growth and are seedbeds for innovation. Despite this, the average profit margin for an SME is £8,000.

Considering the current economic climate due to the outbreak of Coronavirus and the above statistics, it reveals that most SMEs are likely currently experiencing incredible levels of financial strain. Therefore, we believe that ensuring that your company benefits from schemes like the R&D tax relief is especially paramount to help alleviate some of the financial burden your company may be experiencing.

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What is R&D tax relief?

What is R&D tax relief? Research and Development (R&D) tax credit is a valuable government initiative that is designed to encourage and reward companies investing in R&D projects that will help further knowledge in a given field. It does not always have to be something completely new, you can be improving the previous version of your product, as long as there is an aim of achieving a scientific or technical advancement and uncertainty, you may qualify, regardless of whether the project was ultimately a success. There are two types of tax credit schemes that a company can claim, either the SME R&D relief or RDEC, you can learn more about the two schemes here.

Why is it important?

Why is it important for SMEs to explore whether they can claim R&D tax credit? A successful R&D claim is a way of alleviating critical cashflow problems that many SMEs are currently experiencing due to the pandemic. If you are considering alternative revenue streams and funding to keep your business afloat, help with workers’ salaries and other expenses, an R&D claim can be the answer. 

A successful R&D tax relief claim can result in a repayment of paid corporation tax, a cash credit from HMRC or a reduction in a future corporation tax bill. The scheme itself is tied to financial periods of the company and in most instances, you can look back up to two years. With this scheme, companies can claim up to 33p per £1 spent on eligible R&D activities across a range of qualifying expenditure types. 

How long does it take to receive the benefits?

The HMRC’s guidance for processing SME claims is set at 28 days, with an additional two weeks on top for any payment processing where a cash credit or refund is due. In other cases, where an imminent corporate tax payment is due for the relevant claiming period the benefit of submitting an R&D claim is immediate. 

Although HMRC is currently processing a huge amount of other government emergency financial measures, they have made a statement that they aim to clear up to 95% of SME R&D tax credit claims within the 28 day timeframe, as they recognise that processing these claims as quickly as possible is another way of helping SMEs alleviate some of their current financial strains.

Can you claim under the Coronavirus Business Interruption Loan (CBILS) and also get SME R&D tax relief?

The CBILS is considered state aid, therefore if your company received CBILS, you may need to claim under the less generous Research and Development Expenditure Credit (RDEC) scheme. The deciding factor will be whether CBILS was used specifically to pay for the company’s R&D project or if it was intended to be used more generally to support the business. If the payment wasn’t used for R&D purposes, we suspect then the SME R&D tax relief remains viable. 

Going Concern

To receive R&D tax relief, it’s important to certify that your business is a going concern, as that is a statutory requirement. HMRC will monitor to ensure that a company claiming R&D tax credit is able to meet the going concern requirement, therefore for businesses whose position is unclear as a result of the pandemic, it is best to have an R&D specialist look over your accounts first before making a claim. 

Overall, we are seeing more and more SMEs bringing forward their R&D claims, or looking for qualifying projects within their business. Currently, we are happy to advise and help SME get access to finances in a number of ways. Our sister company – Optimal Compliance, helps companies apply for the traditional Coronavirus support, such as Coronavirus Job Retention Scheme and CBILS. Meanwhile, our R&D tax solution Novel, help companies wishing to do an R&D tax relief claim do it themselves and retain most of the benefit rather than pay a percentage to https://novelapp.co.uk/benefits-and-pricing/.