NW economy ‘losing millions of pounds in unclaimed tax relief’

THE North West economy is missing out on a shot in the arm worth millions of pounds because businesses are not properly educated about research & development (R&D) tax relief, an expert has warned.

Companies in high-value sectors – like manufacturing, pharmaceuticals and chemicals – are often unclear about what activities they could claim tax credits on because of how complex the system is, according to Steve Blacker, director of R&D tax services at Deloitte in the North West.

Mr Blacker said businesses often under claim the available tax relief for activities where R&D and production overlap.

He added that new guidance, published recently by HMRC on how to define the boundary between R&D and production, would be helpful for potential claimants but ultimately the individual circumstances would dictate the extent of a possible claim.

Companies also need guidance on areas which many do not realise can be subject to R&D tax relief, such as Qualifying Indirect Activities, including feasibility studies and time spent recruiting research staff for a qualifying project.

Blacker said: “The North West is one of the UK’s key regions when it comes to R&D-intensive businesses as we are very strong in sectors such as advanced manufacturing, chemicals, TMT and pharmaceuticals.

“However, we find that many firms are not aware of all aspects of their R&D investment that they can claim against. We have dealt with many cases where the claimant has included in their claim only the costs of their R&D or technical department but nothing outside of that.

“In such cases, eligible associated costs which cross over into the manufacturing process often go unclaimed. In one example, a single business under-claimed by well over £1m of qualifying expenditure. Taken together, the unclaimed tax relief may mean tens of millions of pounds are not being invested in the North West economy at a crucial time.

“Meanwhile, as announced in the recent Budget, the R&D scheme for large companies or SMEs who use grants or are subcontracted will transition in 2013 from a taxsuper-deduction to an ‘above the line’ credit which will directly reduce the net cost of the R&D carried out by technical teams and incentivise them to do more. However, these businesses require expert advice on managing the impact of this transition as HMRC may expect companies to be ‘optimistic’ in their assessments of how much credit they believe they are eligible for.”

R&D tax credits are currently delivered either in the form of a tax super-deduction based on R&D spending or, for certain loss-making SMEs, in the form of a repayable cash tax credit.

SMEs can claim a corporation tax deduction equal to 200% of qualifying R&D expenditure from their taxable profits from April 2011 (225% from April 2012), while larger organisations can deduct an amount equal to 130% of eligible R&D expenditure. Loss making SMEs can claim a cash payment worth up to 25% of qualifying R&D expenditure each year.