In the UK, HMRC provides R&D Tax Credits to companies as an incentive to promote research and development. Under this scheme, a company engaged in qualifying R&D activities can either reduce the amount of tax it pays, or get a cash sum upfront. R&D Tax Credits promote investment in innovation, and could be the key to survival for many Small-to-Medium Enterprises (SME) in the UK today.
Many companies in the UK have lagged behind their European counterparts in applying for R&D credits. By some estimates, fewer than 5% of eligible companies have taken up the scheme. The main reason for this situation is that many SMEs operating in manufacturing and software development may not be aware that they carry out certain kinds of R&D as defined by the HMRC. In addition, there may be uncertainty regarding the kind of processes to be followed to document R&D claims.
How companies can qualify
For companies to qualify, there are employee size, revenue, and other criteria they need to meet, details of which can be found on the HMRC site. The HMRC also requires that a company’s R&D activities lead to a resolution of technological uncertainty—which need not necessarily be the kind of purely scientific research done at large research centers. If the technology that a company is working on is innovative, and there is no ready solution in the public domain, such technological development activities can probably be considered to be R&D under the purview of the scheme.
HMRC guidelines clarify that “Rather than stating the name of the product, process, functionality, etc, being developed you should consider what scientific or technological advance is being sought. This focuses attention on the project's aim for an advance, which is the key issue in judging whether R&D for tax purposes is being undertaken. Science does not include work in the arts, humanities and social sciences (including economics).
It's not enough that a product is commercially innovative. You can't claim in respect of projects to develop innovative business products or services that don't incorporate any advance in science or technology.”
Several costs associated with resolving technological uncertainty can qualify under the tax credit scheme. Eligible costs can include staff costs, heating, lighting, power, software, and consumables. Up to 65% of agency staff (part-time or external staff) can be considered as well as deductible expenses. Certain qualifying indirect activities are also eligible, such as clerical and financial activities undertaken by the R&D teams.
Employee costs include staff salaries for those directly engaged in carrying out R&D, under an employment contract, and not consultants, agency workers, other staff, or directors employed by other companies. In certain cases, even employees of other companies may qualify under the rules for staff providers, or subcontractors.
The importance of record keeping
HMRC requires that organisations maintain business records to show tax inspectors information on qualifying expenditures for projects presented for R&D tax credits. Many tax consultants recommend that companies maintain records of staff time for R&D projects. Documentation for any subcontracted work must also be provided, with work contracts that can be used to back up claims.
Detailed timesheets that establish the number of work hours put in by R&D staff are vital when it comes to backing up claims of R&D related expenditure to HMRC inspectors. Manual time tracking on paper time cards or spreadsheet-based timesheets are error-prone and can be tampered with, as time records can be entered incorrectly or based on a staffer’s memory. A time tracking solution such as Replicon TimeCost can save the day when it comes to claiming R&D tax relief, just as Replicon itself benefits from using its own solutions.
Replicon TimeCost easily captures project data for tax claims
With solutions such as Replicon TimeCost, applying for R&D tax credits is simplified by having the detailed reports of time spent by research staff on each project. Project hours are tracked in clearly defined fields, with all the relevant data available on one screen. The great advantage of this solution is that it helps set up a streamlined and repeatable process for project time tracking for R&D tax credit applications, while capturing the details of each task, along with time entries, project descriptions, and comments. Armed with detailed project and staffing data, companies can confidently apply for R&D tax credits and have all the data needed to justify their claims.