This is part of our series of blogs on the way in which creatives may obtain finance for their work. Written by guest blogger David Farbey of Myriad Associates this piece reviews one aspect of the UK Tax system which could benefit creative companies – R&D Tax relief.
David writes how as well as specific funding and grants for creative projects, some activities undertaken by companies working in the creative sector may be eligible for public funding in the form of Research and Development tax relief.
What is Research and Development (R&D) tax relief?
R&D tax relief is a government incentive to encourage innovation. It is administered in the form of a reduction of or rebate on a company’s liability for corporation tax. R&D Tax Relief is not limited to any particular industry, and you don’t need to have a team of lab-coated scientists in order to apply. In the year to April 2016, the government gave away some £2.9 billion in this kind of tax relief to companies undertaking R&D across all sectors of the economy, benefiting more than 25,000 companies.
You do not have to be in profit to make a claim.
As R&D tax relief is a reduction or rebate on corporation tax, the first thing to know about claiming R&D tax relief is that you must be a UK company that’s liable for that tax. Your company does not have to be profit-making in order to claim a benefit under this scheme, as loss-making companies can get their R&D tax credit as a cash rebate. However, the R&D tax relief incentive isn’t available to self-employed people. The amount you can claim is related how much you have spent on R&D, and there is no upper limit on this.
What activities qualify as R&D?
The Government’s current guidelines state that R&D tax relief is allowed when a company is undertaking work that is attempting to make an advance in science or technology, or an appreciable improvement in existing technology. Such work must be aimed at resolving a technological uncertainty, and be aiming at a solution that was not readily deducible at the start of the project. Projects therefore proceed through experimental development and testing and as a result – even if the project does not succeed – add to the sum of knowledge in their field.
How does it work for Creative Activity?
At first glance the exclusive role of technology in defining R&D may seem to exclude the sort of creative activities that occur in the arts and the humanities, and although this approach is being challenged by research from NESTA and others, it remains government policy for the time being However, there is nothing to say that an entire project must fall under this definition of R&D in order to make a claim for tax relief. Hardly any aspect of modern life is entirely free of technology, and that includes the plastic, performing, and digital arts. If one segment of a project in the arts involves not just using technology, but developing new technology, then the costs of that part of the project may well be eligible for R&D tax relief.
How much is R&D tax relief worth?
Once you have demonstrated that you are undertaking a project that qualifies as R&D, you can calculate the expenses incurred by that project and, if you are a small to medium sized company, you can get back up to 26% of your R&D expense as a saving on your corporation tax bill. Loss making companies can surrender their losses for a cash payment worth up to 33% of the R&D expenditure.
The most significant element of claimable costs under the scheme is staff costs, and this can include both your own staff and any subcontractors. Direct staff costs include salaries, employer’s National Insurance contributions, and any company pension payments. You can also claim up to 65% of subcontractor costs. The claim should relate to the amount of time actually spent on qualifying R&D projects, so for example if someone spends 30% of their time on R&D you can claim 30% of their salary costs.
How do you submit a claim for R&D tax relief?
Once you have calculated the amount you are entitled to claim as R&D expenditure you need to enter the amount on your company’s tax return form (known as CT600). If you aren’t ready to claim when you submit your original return, you can submit an amended return up to two years after the end of your company’s reporting period. That means that if for example your accounting period runs from 1st April to 31st March each year, you have until 31st March 2018 to submit an amended return with a claim for R&D tax relief for the period that ended on 31st March 2016.
In addition to submitting the correct figures on your tax return, it is a good idea to accompany this with a narrative report describing your project. Your report should explain what the technological challenges were, how you overcame them, and why the solutions you developed constituted an advance in technology. Many firms choose to use specialist consultants and advisers to help with preparing their R&D tax relief claims, as they have understanding and expertise in knowing what the tax authorities look for when they evaluate a claim.
David Farbey, Senior Technical Consultant, Myriad Associates
About the author
David Farbey is a Senior Technical Consultant for Myriad Associates and helps clients achieve their R&D funding by researching and writing technical reports to support R&D tax credit claims and grant applications. David is a Fellow of the Institute of Scientific and Technical Communicators (ISTC), and also a Fellow of the RSA. He serves on the ISTC Council and was Chair of the ISTC’s annual Technical Communication UK conference from 2012 to 2015