Research and Development (R&D) tax relief is often not thought of by retail businesses. However, many of the activities undertaken around both products and systems could qualify as R&D and lead to cash savings.
Many in the retail industry do not believe that they are undertaking R&D, but there are a wide range of areas in the retail sector where this relief is very relevant and consequently significant benefits are going unclaimed. What actually constitutes R&D is wide ranging, but includes the development or improvement of a product or process - there must be a technological advancement (i.e. something new or an appreciable improvement over what is currently available) and an attempt to resolve technological uncertainties (i.e. there must be difficulties and challenges for an experienced product developer or software engineer). The project does not have to actually achieve its aims in order to qualify.
For small and medium sized businesses (SMEs) this takes the form of an additional tax deduction calculated as 130% of qualifying costs and provides an effective cash tax benefit of c25% for profitable companies. For loss making companies, a cash credit of up to 33.35% is available.
For expenditure from 1 April 2023, the rates are reduced with an additional tax deduction of 86% of qualifying costs, providing an effective cash tax benefit of up to 21.5% for profitable companies. For loss making companies, a cash credit of up to 18.6% will be available.
For larger companies (over 500 employees and either €100m turnover or €86m gross balance sheet) the benefit is reduced, but is recognised above the line, i.e. as an increase to operating profit. The effective cash tax benefit is 10.53% of the spend. For loss making companies, the 10.53% is available as a cash credit.
For expenditure from 1 April 2023, the effective cash tax benefit will be 15% of the spend. For loss making companies, the 15% is available as a cash credit.
Capital spend on R&D should also not be overlooked as there is an immediate deduction available for capital R&D expenditure. This can give a significant cash-flow benefit when compared to other allowances where, the relief could be given over more than 10 years, and in many cases, over 33 years.
You can claim relief on costs that have been expensed through the Profit & Loss account and in certain circumstances you can also claim expenditure capitalised as intangible assets). The main areas of costs that can be claimed are:
- Staff costs (gross pay, employer's NI, employer's pension contributions and certain reimbursed expenses) of employees directly and actively involved in the R&D and also where undertaking certain supporting activities.
- Agency workers.
- Software license costs.
- Consumable items (including a proportion of heat, light and power).
Understanding your industry
It is not enough that a product is commercially innovative; it must go beyond this to seek an advance in science or technology. However there are many activities in a retail business that could qualify for R&D tax relief, in fact retail groups around the world are investing in innovation labs and development houses in order to improve in many of these areas. The key areas where R&D can be found are in product and systems development:
Product – the development of new, bespoke or appreciably improved products, including
- Innovative development using CAD tools.
- Development of second generation or improved versions.
- Designing, constructing, and testing prototypes.
- Integrating new materials to improve performance and processing.
- Increasing ease of operation, suitability or sustainability of products.
Systems – Advances in controls, sensors, networks, and other software technologies to improve quality and productivity, including:
- Warehousing and stock control.
- Supply chain management.
- Distribution and logistics.
- Marketing – customer targeting and profiling.
- Payment systems.
- E-Commerce platforms and mobile apps.
Why THIS R&D?
The tax relief available is generous, but claims must be properly made to ensure they meet HMRC requirements. HMRC will review all claims carefully - so it is important to work with experienced tax advisors to ensure any claim meets the necessary criteria.
THIS R&D can assist by ensuring that all activities that could qualify for the relief are identified, assessed, documented and where appropriate, claimed. Tom Byng has over 20 years’ experience of R&D claims, not only in the retail industry but also in numerous other sectors and has developed a cost-effective methodology, working with you to prepare a robust R&D claim with minimal disruption to your core business. We will also leave you with a working model such that you are in a position to prepare subsequent claims in house, if required.