Tax & Admin

Research and Development Tax Relief: A powerful strategic & tax planning tool

Terry Cheesman | 21 September 2020 | 4 years ago

Research and Development planning,  charts and graphs
The R&D tax allowance can deliver additional tax savings
Research and Development tax relief has been in the spotlight during recent years, but many businesses remain unaware of the extra benefits this tax allowance can deliver. Specialist R&D and Capital Allowance expert, Terry Cheesman, explains more.

The best-run companies regularly assess how their operations would be impacted by unpredictable events, but no one could have foreseen how the outbreak of Covid-19 would impact supply chains across the world. In this strange new world we find ourselves in it’s critical that cash-starved companies consider every opportunity available to them.

The factory and workplace of the future must be resilient to weather any economic storm. The all too familiar sight of empty factories and offices, broken supply chains, furloughed staff and cessation of production is a warning that to independently survive whatever nature throws at us, change is needed.

Many of the technologies listed below are, and can, be applied to manufacturing and office -based environments across functions such as:

  • Shop floor and office automation
  • Remote diagnostics and IoT (Internet of things) applications
  • Preventative maintenance sentinels
  • 3D design simulations
  • ERP and MRP functionality
  • 3D training manuals
  • Digital marketing and CRM integrations
  • Real-time factory to back office integrations
  • Supply chain portal development
The cost of implementing these things has reduced significantly over the years, making the technologies more accessible. And combination funding such as Made Smarter UK and R&D Tax relief make it more attainable than you might think, in providing a de-risking mechanism for business owners.

What are R&D Tax Credits?

R&D Tax Credits are a government incentive designed to reward innovation and accelerate growth in UK Companies. It came into sharper focus in the run up to Brexit and the realisation that the UK, at the current rate of R&D uptake and digitalisation was never going to meet its target of 2.4% GDP invested in internal R&D efforts by 2027.

The government is committed to widening the scope of R&D tax relief to include all things cloud accounting and data management (probably as a short-term emergency measure for a number of years). This, coincidentally, ties into necessity in a post-pandemic world for total data resilience to accommodate remote and home working.

Adapt or Die has never been so relevant. R&D is all about doing things smarter, faster, cheaper, and better by using technology and science in a new, non-standard way.

Case study as we went into lockdown:

Family run manufacturing business, in existence for 17 years and had never made an R&D claim. They made a successful claim in March 2020 for the last 2 accounting periods for 243, 000 physical cash (a lifeline given the economic climate since their biggest clients mostly closed in lockdown: London bars, high street chains and airports).

Below are some of the project areas involved:

  • Tooling and equipment design and development
  • Prototyping, including designing, constructing, and testing products
  • 3D modelling
  • Evaluating and determining the most efficient material profile for products and processes
  • Streamlining manufacturing processes through automation
  • Integrating materials to improve product performance
  • Developing novel and innovative control programs
  • Development of second and third generation products
  • Scaling up of production processes
The business owners have available land to expand the production facility.


Maximise your tax relief with Research and Development Allowances: When R&D and Capital Allowances Meet

Whilst R&D tax relief has been in the spotlight during recent years, other forms of tax savings are often overlooked. In fact, many businesses are unaware of the extra benefits that Research and Development Allowances (RDA) can deliver in the form of additional tax savings.

RDAs are a form of first-year capital allowance which allows 100% tax relief on expenditure for assets used for R&D activities.

Surprisingly, RDAS (formerly known as Scientific Research Allowances) have been in existence since 1962 and can significantly reduce your company’s corporation tax. But they are relatively unknown and not enough businesses are taking advantage of this lucrative form of tax relief.

The asset expenditure must have incurred for the purpose of research and development to seek an advance in solving science or technological uncertainties.

Whereas R&D tax relief relates to operational costs such as staff wages, subcontractors, materials etc, qualifying RDA capital expenditure can include the cost of brand new assets, such as buildings in which the R&D is carried out and equipment used to conduct the R&D activity.

For example, you may have spent money on building or refurbishing research and development facilities, created a new IT infrastructure or invested in new plant and machinery, tools testing equipment or even company vehicles.

Unlike mainstream Capital Allowances, an RDA claim can be made on a whole asset, including structure, and setting (everything but the base cost of the land and intellectual property). The asset must be used in the R&D efforts for 75% of some time it can be repurposed or put to commercial use later (no claw back of the relief unless it is sold, scrapped or the subject of an insurance claim).

The beauty of RDAs is there is no upper limit on the amount which can be claimed (unlike the Annual Investment Allowance which is capped and cannot be claimed for setting/structure). They can produce significant reductions in tax liabilities to Nil and/or create future tax savings, ensuring no tax is paid for quite some time going forward.

Recent case: April 2020, family run waste management company through a combination of R&D tax credits and an RDA I achieved tax savings of 579, 000.

Seizing opportunities in the most challenging times and environment is something we in the UK are renowned for: from the Industrial Revolution through to Industry 4.0, Britain has led the way.

Necessity is often the mother of invention. Seismic, paradigm-shifting imperatives have shone a refreshing light on a very different future world. Digitalisation, Green Energy and Sustainability have been given the welcome boost they’ve always deserved (timelines shortened from 5-year planning cycles to 1 year or less).

Who would have conceived in January 2020 global commitments to pursue energy solutions like Hydrogen at seven times the cost of traditional solutions? Future proofing is no longer a luxury budget item.

Traditional and people-centric sector industries and services have proven to be the backbone of society throughout lockdown and must be rewarded and protected in the new world order. The radical changes to ensure future resilience all naturally feed into tax relief through R&D claims.

The power of exponential networks and new consortium models to rapidly mobilise have given many a renewed sense of community and collaboration. The positivity that this has promoted and allowed to thrive has been a great fuel to stoke the fires of passionate dreams. Active dreamers can be true dynamic forces for progressive effect and change for the better.

What can R&D tax relief do for business owners?

With the right forward-planning the possibilities are endless. Here are a few pointers:

  • With profit margins tight, a commitment of 2-7% of turnover in most sectors devoted to the R&D mission statement and activities is enough to ensure a corporation Tax liability of Nil.
  • R&D tax relief strengthens the balance sheet by creating an HMRC tax debtor or reducing/eliminating a tax creditor. Furthermore, you can choose to capitalise (as an intangible on your balance sheet) development costs (staff costs, subcontractors, software)
  • Replacing dividends with a bonus and/or executive pension contribution will take many higher rate tax paying business owners (deployed at least 54% in the R&D effort in the medium term) out of self-assessment for personal tax and bring more cash back to the family bank balance.
  • Additionally, the ability to show to external stakeholders a profitable company in accounting terms but paying zero tax is a very attractive acquisition proposition. R&D tax relief even allows a tax loss making company to get paid by the Exchequer for taking risks.
In my R&D career I have helped a wide range of clients; from a company that has been designing and manufacturing pool tables since the 1970s, to a stained glass restoration company which was commissioned to reverse engineer windows for Westminster Abbey. An R&D claim has helped the business to expand its glassmaking techniques to creating bomb proof glass for the airport industry. I have even saved the makers of the practise costumes for Strictly Come Dancing a substantial amount of tax.

Whatever industry you’re in, R&D tax relief gives business owners and entrepreneurs the power to Dream on, Dream Big, Innovate & Succeed.

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