When you hear the phrase “research and development” you probably think of scientists in white coats, mixing chemicals in a lab. You certainly don’t do anything like that in your creative business, so you’ve always assumed you weren’t eligible for tax relief through an R&D claim.
In reality, the creative industry is rife with experimentation and innovation, exactly what R&D tax credits are designed to reward. If done correctly, these claims can be a great way to save on tax or get some ‘free cash’ into your business.
R&D claims were designed to reward innovation
The UK government introduced R&D tax credits back in 2000 as a bid to promote innovation. Companies undergoing risky research and development are rewarded with a Corporate Tax reduction, cash payment or an enhanced loss.
If, for example, you have a £100,000 expenditure that qualifies for R&D tax relief, you can deduct that total amount from your taxable profits plus an uplift of 130% for a total deduction of 230%. This would reduce your overall taxable profit by an additional £130,000 and save you nearly £25,000 at a tax rate of 19%.
If you’re a loss making business, you could instead choose to extend your loss by that £130,000 and exchange it for cash back at a rate of 14.5%, or £18,850 back in your pocket.
As you can see, especially for start-ups or other creative businesses investing large amounts of money into building their products, these claims can be hugely lucrative. One of the most successful R&D claims we’ve helped a client with resulted in an annual payment of just over £250,000!
Of course, not every claim will result in a quarter of a million pounds deposited in your bank account. But even if it’s just a few thousand pounds, you could be leaving cash on the table by not exploring this option for your creative business.
Many creative businesses qualify for R&D claims
A survey conducted by the Creative Industries Policy & Evidence Centre found that 68% of creative businesses reported doing some sort of research and development, yet only 14% of those eligible actually made a claim.
This huge discrepancy is most likely due to a misunderstanding of what research and development actually means. Remember, it’s not all lab coats and beakers. To see if some element of your business might be viewed as R&D by HMRC, ask yourself:
1.Am I looking for an advance in science and technology?
This could be the creation of an entirely new product, process or service, or it could simply be an improvement upon an existing one, enhancing its functionality, performance, reliability or quality.
Taking an existing solution and simply using it in a different way doesn’t count as an advancement. You couldn’t, for example, use a piece of existing software for a new purpose and claim that as R&D. If you built out a new module for that existing piece of software, however, so it could do something it hadn’t been able to before, that would qualify.
2.Have I overcome uncertainty?
HMRC wants your research and development to have faced some degree of risk. Why might it not have worked? What could have gone wrong? What did go wrong? Did you need to create multiple iterations or models before you were successful? Documentation like risk mitigation reports are a good way to prove this uncertainty when it comes time to file.
It’s also important to note that a product, service or process doesn’t have to be successful in order to qualify for R&D. HMRC will still want to reward your efforts into research and development, even if you weren’t ultimately able to overcome the uncertainty or risk you faced.
3.Could this not be easily worked out by a professional in the field?
HMRC wants to see that the advancement you made (or attempted to make) could not have been easily achieved by a professional. For example, I couldn’t claim I was undertaking research and development to create a covid vaccine when there are experts in the field who have already done that.
If you answered “yes” or even “maybe” to all these questions, then R&D tax credits are worth looking into. But be wary: there are some risks involved with R&D claims, which is why we always recommend consulting with an accountant before you file.
If you’re still not sure you’re eligible for R&D tax relief, or would like to chat more about how we can support you with a claim, start by filling out this form.
