Did you know you may have cash hidden in unclaimed R&D tax credits? Mike Whitacre interviews Thomas Wells, leader in our UK R&D Tax Credit practice. Thomas Wells explains the benefits of R&D tax credits and which companies may qualify.
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Untangling the Technical: UK R&D Tax Credits – Untapped Potential
This transcript was assembled by hand and may contain some errors.
It has been edited for readability.
Mike Whitacre Hello, this is Mike Whitacre. I’m one of the leaders of Frazier & Deeter’s International Business Practice. I’m happy to be your host for a special series of podcasts, Untangling the Technical UK edition. This podcast is where we talk about topics that seem complicated, but break them down to help business executives understand opportunities.
Today, we are excited to have Thomas Wells on the podcast. Thomas is the leader of Frazier & Deeter’s R&D tax credit practice for the UK. Thomas, before we dive into how the tax credit works, could you give us an idea of why this is a timely topic?
Thomas Wells Thanks for having me on. At the moment, the UK has a massive amount of upheaval in the SME and large corporate spaces, with Coronavirus closing down many businesses. The R&D tax relief system in many ways provides a potentially large cash injection for SME businesses and large corporates alike. We can go back up to two trading years and make claims against overpaid corporation taxes. The claims are normally processed on a “no win, no fee” basis, so there’s no risk to the business and, while people are at home unable to undertake their core trading activities they have time to undertake this work when normally they wouldn’t.
Mike Okay, this is a great opportunity potentially for companies to go back and find some extra cash. How does a company qualify for the credit?
Thomas There are two main criteria that a company would need to meet in order to qualify. The first is that they have to undertake a project that aims to overcome a technical or scientific uncertainty in their field. The second is that the project must aim to create an overall advance in scientific or technical knowledge within their specific industry.
This advance could be an improvement in efficiency, development of a new product, process, or the creation of a new material, or the onward development and alteration of existing technology to complete a new task it wasn’t designed to undertake. There are a couple of exclusions in terms of businesses and industries that qualify; those are the arts, pure mathematics, economics and some social sciences, but many of these are covered under their own individual tax reliefs.
Mike Okay, Thomas. So those are the technical criteria for qualifying, can you give us a couple of real-life examples of credits that people may not realize actually qualify?
Thomas Of course, looking and thinking back about claims I’ve done in the past, and businesses I worked with, I’ve got three examples here to talk through with you.
The first was a large construction company working as a main contractor who had taken on a complex site in the central of London. Following excavation of the site and the commencement of the development work, they came across a large amount of landfill that had actually been on site for around 500 years.
The process of dealing with that, decontaminating it and making it safe for onward development from a surety of land point of view, was a real challenge. They undertook a significant process lasting in the region of 12 to 18 months doing that work. They qualified through that process of having advanced the industry because there were no written guidelines or no information in the marketplace about how to deal with that project or how to deal with that situation.
The second is the veterinary practice based locally in Essex, that developed a new method of helping horses recover from respiratory illnesses such as asthma. Historically, these illnesses would have been treated with fairly heavy dose of steroids. At the end of that process, if there hadn’t been improvement, there would be no other option but to euthanize the horse. The work that they’ve done provides a further ongoing option, a continuous option for medical treatment where there isn’t an overdose potential. It works to save a number of horses that previously were not being given the opportunity to stay alive.
The final one would be an engineering company. They spent a significant amount of time reinventing a fan for the extraction of cement dust, at a building plant. Historically, these fans are made out of aluminum, so they’re very light; strength was an issue. Redeveloping this to a stronger material, while maintaining the lightness of the previous aluminum fan was a real challenge because obviously a stronger material typically weighs more. They had a long process of development there that led them to qualify.
Mike Thanks, Thomas. Those are good examples, can you give us an idea of the typical size of the credit?
Thomas Of course, in the UK marketplace there were two R&D tax relief schemes that run alongside each other. The first one, is aimed to SME businesses and there’s a set definition for SME, which is a business with a turnover of less than 100 million euros and a balance sheet with assets less than a 100 million euros and less than 500 staff.
In order to be considered an SME, a business can’t have two of those criteria, so if you turned over 100 million euros, obviously sterling equivalent, but didn’t have assets of more than a 100 million euros or 500 staff, you would still be considered an SME.
The average claim size the businesses in that bracket, is around £53,500 per year. Again, that could be backdated two years, could release a cash tax repayment for more than £100,000, to the business. For ongoing payments, there’s no limit in terms of the number of uses you can submit claims for or provide an ongoing project work. It could be a tax saving every year in the region at £53,500.
The second scheme that runs alongside the SME R&D tax system is a scheme called the Research and Development Expenditure Credits. This is aimed at companies that don’t qualify for the R&D Tax Relief system that we just spoke about. It provides a flat rate credit for R&D project work.
The value of these claims is materially higher, often over £300,000 because of the size of the company and the amount they are going to invest in the research and development. Again, the qualifying criteria for the SME means the majority of claims made in the UK marketplace fall into that bracket. But at the moment in the UK, there are about 43-45,000 claims made per year for the R&D tax relief system on the SME side.
Obviously, when you consider the number of companies that are trading in the UK marketplace and the level of innovation generally seen in the UK as a service provider, there are a huge number of businesses missing out on a valuable cash injection or tax saving every year.
Mike As we Americans say, they are leaving money on the table for sure. Thomas, we’ve covered how it works, some examples and the potential for a new source of cash flow. Is there anything else you’d like our listeners to know about the R&D credit in the UK?
Thomas The final comment for me really is that when you engage a specialist making an R&D claim is far easier than you think. Potentially, a significant amount of money could be back in the bank in as little as six to eight weeks. I think the final question I’d ask, is what could you do if £100,000 came back into your business at the moment?
Mike Thomas, thanks again for your time. It’s been great talking to you today. To our listeners, thank you for listening to Frazier & Deeter’s Untangling the Technical podcast series.