Guest Blog by Claire Upton, Director at Copper Tax.
As a tax relief aimed at supporting UK incorporated research and development companies, R&D tax relief delivers a source of funding in a way that scales with the growth of a business. For companies routinely investing in innovation, it should be considered as part of an overall funding strategy to provide additional cash resources alongside other funding types.
Why is this tax relief is so valuable to companies operating in the Medtech space, how does it work and what are the headline eligibility criteria?
R&D tax relief provides a consistent mandate to support innovation through work that seeks to create new knowledge and/or capabilities in fields of science or technology. As a tax item, this funding is government backed and is available to all companies that qualify, year on year. It’s a long-standing tax relief that’s been in place for some 23 years and forms part of a suite of innovation incentives intended to bring “additionality” to facilitate the UK becoming a global science/tech superpower.
It does not matter whether you are a new or more established start up, in scale up or have an established and profitable business. This tax relief will be available to all companies that attempt to push the boundaries of scientific/technological knowledge and capabilities to create new products, processes, materials, devices or services.
- Why is R&D tax relief so valuable?
- How is funding delivered?
- How do you calculate the amount of funding?
- Understanding qualification criteria
- What is an advance in science or technology?
- What is scientific or technological uncertainty?
- Qualifying projects in MedTech
- Supporting your claim
- Exploring the potential for your company to benefit from this tax relief
Why is R&D tax relief so valuable?
- Timely – considered in line with your company’s annual accounting period. Funding is claimed via the company tax return.
- Ease of access – This is a tax item on the company tax return. The amount of tax relief is calculated based on the relevant UK tax code (more on this later), and that number is then reflected in the company tax computation and added to the relevant box on the company tax return. R&D tax relief therefore forms part of the company’s annual tax filing.
- Repeatable – Companies can claim R&D tax relief for each accounting period that work undertaken meets the qualification criteria.
- Scales with the growth of your research and development activities – As your business grows, you may be able to invest in more scientists/technologists to expand the reach and scale of your development activities. Because this tax relief is linked to key expenditure on development projects (staff and consumables being the most significant cost categories); the more you spend on resourcing your development work, the higher the value of the tax relief attributable to your spend. And so begins a cycle of reinvestment and growth, supported year on year by R&D tax relief.
- Non-competitive – Unlike applications for grant funding or competitions, if your company meets the requirements for the tax relief, you will benefit from this tax relief.
- Unrestrictive – It is not a loan to pay back. There is no need to give up control of your company for cash investment. It is not as onerous as grant application, monitoring, and reporting.
- Boosts EBITDA – currently there are two schemes for R&D tax relief. The R&D Expenditure Credit Scheme (“RDEC”) works by creating a notional taxable credit, which is recognised above the line in the annual accounts as additional income, increasing profit before tax. The credit is then offset in the tax calculation to give the net tax benefit. Sometimes SMEs must claim under RDEC, and going forward, HMRC is looking to merge the two schemes into a single RDEC like scheme.
How is funding delivered?
R&D tax relief provides funding in two possible ways:
- If your company is profitable, it reduces your company’s corporation tax liability. This means you’ll pay less tax over to HMRC and retain more cash in the business to reinvest.
- If your company is currently operating at a loss (or tax adjustments to profit before tax result in a net trade loss for tax purposes), there is a possibility to claim a cash credit from HMRC. This cash can then be reinvested back into the business.
How do you calculate the amount of funding?
This is worked out based on certain phases of the development work within projects and linking defined permissible cost categories to that work. The steps can be summarised as follows:
- Understand which phases of project work qualify (see section below on qualification criteria).
- Work out which scheme of relief you can claim under (SME, RDEC or both).
- Identify qualifying expenditure from the 5 main categories – see below.
- Establish how expenditure incurred links to the qualifying phases of work and apply the tax rules to each expenditure category to calculate the amounts that can be claimed.
- Add up total qualifying costs from each category – these should be calculated on a project-by-project basis and then totalled for inclusion in the tax computation.
- Under the SME scheme – claim an additional deduction in the tax computation. If there is no tax to offset, you can obtain a payable cash credit.
- Under the RDEC scheme – recognise the credit as additional profit, tax it and then claim a deduction for the credit against tax payable (this gives you a net deduction). If there is no tax to offset, you can obtain a payable credit instead, subject to certain restrictions that may apply.
Understanding qualification criteria
For there to be R&D for the purpose of this tax relief, a company must be carrying on a project that seeks an advance in science or technology … through the resolution of scientific or technological uncertainty.
Making an assessment as to whether the work you are doing qualifies for research and development tax relief purposes is not some kind of “dark art” – it just feels like this to start with because it is unfamiliar to you.
The requirement for there to be an “advance” attempted by reference to a field (or subfield) of science or technology through the resolution of “scientific or technological uncertainty is perhaps the most challenging, misunderstood and at times, opinion dividing part of R&D tax claims qualification criteria.
What is an advance in science or technology?
When it comes to working out if your work is attempting an “advance”, you must look beyond the commercial outputs and focus instead on the significance of the scientific or technological inputs within that project.
Defining an advance, almost always starts with looking at the tangible or intangible outcomes sought. Focusing on the point of difference you are seeking to deliver via a new or improved product, process, material, device or service.
However, you must then look to the underlying field (or subfield) of science or technology that will facilitate the new tangible/intangible outcomes. Considering and benchmarking how your development work creates new knowledge and capabilities relative to that field. It is important not to interpret a science or technology “field” as an “industry”. This is not about advancing knowledge or capabilities for an industry; it is always about the underlying fields of science or technology and advance relative to these.
What is scientific or technological uncertainty?
In research and development projects, you will simultaneously work through what is known whilst exploring what you don’t yet know.
Uncertainty means it is not known if something is possible to achieve or how to turn a theory into a viable, repeatable, reliable solution in practice.
The reason something is uncertain might be because:
- There are known limitations of scientific or technology capabilities for your use case, or
- It’s been attempted but others have failed and there is no solution found as yet, or
- Solutions offered in the market do not work in practice for your specific performance, behaviour targets so you need to find an alternative way to achieve something.
The above is not an exhaustive list and will be established based on your feasibility/proof of concept work.
Scientific or technological uncertainty should not be confused with work that is difficult or complex but is feasible based on established methods or principals.
However, problems that can be relatively easily resolved through peer-to-peer discussions without any experimental cycles of development work, are not scientifically or technologically uncertain.
Work to tackle the scientific or technological uncertainties in pursuit of an advance forms the basis of your R&D claim. Expenditure on the areas noted above relating to activities performed to tackle the scientific or technological uncertainties forms the basis of your R&D tax relief claim – this is what drives the ultimate value.
It follows then, that if you have not yet spent money on any of the qualifying cost categories then regardless of whether your work qualifies, you will not have any basis to claim.
Qualifying projects in MedTech
Development work in MedTech can be multi-disciplinary, depending on the purpose. From materials science, manufacturing techniques to achieve design attributes/material handling/repeatability, electrical and mechanical interdependencies, computer science to engineer software/hardware performance over data or to control devices and more.
MedTech requires a whole new approach to innovation these days. R&D in this space is no longer about making tweaks or incremental improvements to current benchmarks or available solutions. How healthcare is delivered is now centred on breaking through barriers to simultaneously deliver value for the end user and stakeholders – the patient and the healthcare setting:
- Lowering healthcare costs
- Improving quality of care
- Longevity of benefits to patient quality of life
- Personalising care
- Ease of take-up
- Accommodating guidelines to increase the chance of obtaining regulatory approval
As noted elsewhere in this blog, the key thing is that the R&D work undertaken to meet the commercial solution aspires to seek an advance in a field of science and/or technology to deliver the attributes sought.
It is expected, therefore, that you will be going beyond the current state of knowledge and/or technology to tackle scientific or technological hurdles standing in the way of achieving the desired outputs – not simply using knowledge or available approaches/technologies “as is”.
Supporting your claim
HMRC will need to understand how your project work meets the requirements of the tax legislation and the BEIS guidelines on The Meaning of R&D for Tax Purposes [link to these is: https://www.gov.uk/government/publications/guidelines-on-the-meaning-of-research-and-development-for-tax-purposes/meaning-of-research-and-development-for-tax-purposes-guidelines]
HMRC will require the advances you are seeking to be clearly benchmarked against current knowledge and capabilities and assured that the qualifying criteria across all aspects of the claim have been correctly understood and applied.
It is important to set out your supporting claim report in a format that makes it easy for HMRC to understand exactly how you have tackled scientific or technological uncertainty through your work.
Exploring the potential for your company to benefit from this tax relief
If you’d like to discuss your project work to explore your eligibility, you can contact me directly at email@example.com to arrange a time to speak.