Tax credits for research and development (R&D) are a welcome support for any business. However, they can be a minefield for small and medium-sized enterprises (SMEs) to navigate.
Many businesses, especially those operating in the IT sector, are unaware that they could qualify for these types of tax breaks. They are available for those businesses that are developing and/or improving products through R&D that lead to an advance in science or technology. As such, this could extend to a software provider that develops a product that has the potential to facilitate such advancement.
On 16 January 2015, the government launched a consultation aiming to improve access to R&D tax credits for SMEs and on 28 October 2015 it published a summary of the responses.
With the responses, HMRC also set out its framework for R&D tax credits for the next two years and beyond. HMRC identified four themes considered to be the key factors which influence access to the tax relief: awareness, design, understanding and administration.
|HMRC intends to increase its communication with businesses via direct emails and Twitter posts to raise awareness of policy and technical developments. HMRC will also look to share data with other government agencies with a view to identifying companies and businesses which would be eligible for the R&D tax credits, enabling HMRC to actively engage with companies directly.
|The definition of R&D will not be aligned with the accounting definition as a result of the strong objection from stakeholders. The definition of “advance in science and technology” will also include a wider range of examples.
Over the next two years, HMRC will consider and review the role of sub-contractors and provide better guidance to help small businesses understand how the rules affect them.
|HMRC intends to produce more detailed and bespoke guidance to assist SMEs on particular aspects that they find the most difficult to understand as well as recording their qualifying activity and expenditure. This will help to provide certainty upfront about what SMEs can claim when undertaking R&D.
|HMRC has launched a voluntary, non-statutory advance assurance service, which focuses on first-time claimants with a turnover of under £2,000,000 and fewer than 50 employees. Its aim is to provide a better understanding of how tax credits affect their businesses and to increase confidence.
Successful applicants will receive assurance that HMRC will allow their first three years of R&D tax relief claims without further enquiry.
In the coming year, HMRC will look to extend the assurance service beyond SMEs.
The consultation and proposed framework demonstrate that HMRC has a real interest in ensuring that its initiatives result in improvements for businesses, so it is vital that you take the opportunity to feedback to HMRC in order to optimise the new approach.
If you are an SME operating in a sector such as IT and would like to explore your tax relief options, we advise you contact your accountant for further details.