We all know how important R&D tax credits are for the Life Sciences, Pharmaceuticals, and Biotech sectors. Most companies in these industries have been claiming since day one, and yet we often encounter companies who are significantly underclaiming.
The average benefit for companies in these industries is just over £110k, but Ayming’s average claim for companies in these industries is currently more than £700k, so why is there such a discrepancy?
Granted, we do have some large clients in this space that may slightly skew our figures, but that is only half the story. One theory is that because companies have been claiming since their inception, there is a tendency towards inertia. We have found time and again that it is worth reviewing your R&D claiming process every two years to ensure you are still receiving the best rates and level of service.
You might be underclaiming in-house
Many companies will undertake the claim in-house or alongside their accountant. With both of these options, we have found considerable underclaiming. Many companies find it tricky to question themselves about work 12 months ago and review them with rose-tinted glasses. On the other hand, Accountants are not technical people and don’t have the broad experience of challenging technical staff regarding the work they have been performing. Using an independent expert can significantly boost claims – our experience is at least a two to three times improvement. While the cost may be more to use an external agency, the benefit can be significant. So, let’s cut to the chase; what are the three most common areas companies are underclaiming on:
- Overly conservative estimations of time spent on R&D projects due to the high standards of R&D in the industry:
We have found a tendency in the life sciences sector to qualify comparatively low percentages of staff time as R&D activity. This is because the industry’s definition of R&D is much narrower than HMRC’s definition of R&D for tax purposes. Many qualifying projects get overlooked because they are not deemed to be R&D by competent professionals in the industry. These projects can often be included in a claim. When all projects are considered, the amount of time staff is spending on R&D is significantly higher than the original estimation.
- Not including QIA (Qualifying Indirect Activity):
Qualifying Indirect Activity is all the activities undertaken to support R&D projects and should always be considered when compiling project expenditures. One example of this would be cleaning staff. Cleaning staff are a completely legitimate indirect activity because labs need to be kept clean. Another example would be technical sales staff. While they are not directly involved in the R&D projects, they often make significant contributions to client-led development work by collecting client requirements and conducting soft launch trials of new products with trusted clients.
- Not evaluating all eligible cost categories:
Most companies know to include a proportion of staff time. Still, three other cost categories sometimes get overlooked because companies aren’t sure how to evidence that they are directly related to the various R&D projects undertaken: Subcontractor costs, consumables costs, and software costs. More often than not, a high percentage of these costs can also be included, provided you have made reference to these costs in the technical report.
More experienced claimants will look at all these categories but often don’t make the most of each category. For instance, consumables can be very high in life sciences, with all the single-use equipment like pipette tips, test tubes, Eppendorf tubes, etc.
While companies underclaim other areas, these three are by far the most common culprits. The key to including the maximum eligible costs in all three areas is to ensure you also have a detailed technical report that references all the included costs. To include these additional costs without the proper supporting documentation would invite an enquiry from HMRC. That is why Ayming employs experienced industry experts to write our fully compliant technical reports.
The danger of overclaiming
While most of the companies we meet in this sector are under claiming, there are, of course, some companies at the other end of the spectrum who are unknowingly over-claiming. One example of this is companies with complex international costs. A company with R&D activity in several different countries with connected externally provided workers (EPWs) paying salaries in non-EEA countries must be cautious. There is a point in the legislation that states you can only claim compulsory employer contributions, equivalent to the UK NICs, in these non-EEA countries. So you would need to review all the salary costs to ensure you are not including anything you shouldn’t be. In a handful of cases, this has resulted in amendments to claims and a slight reduction in the total qualifying expenditure to avoid unwanted enquires.
In conclusion, R&D tax credits can be a valuable form of innovation funding. However, many companies are still not taking full advantage of the government support that is available. Ayming offers all Life Sciences companies a no-obligation review of their R&D claiming process, so companies who haven’t reviewed for years have nothing to lose and perhaps a lot to gain.
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