How agencies can benefit from R&D tax relief to drive innovation
Sophie Smith
Agencies can claim a proportion of research and development investment costs against their Corporation Tax. It is an incentive aimed at promoting innovation.
Our COVID-19 UK Public Relations report has kickstarted a series of industry conversations about what drives innovation in communication and professional services. More on that to come.
A discussion in The House of Marketing and PR community of practice suggested that R&D tax relief credits provided a direct intervention for established companies. This is a government incentive aimed at encouraging innovation among UK companies. Up to 230% of the cost of a company’s R&D can be offset against Corporation Tax providing that it is commercially relevant.
According to accountants Moore Kingston Smith, a company investing £100,000 in qualifying R&D activities can obtain a £230,000 tax deduction, resulting in a reduction in the corporation tax liability of £24,700.
There are two types of relief depending on the size of a company: small and medium sized relief; and research and development expenditure.
Research and Development tax relief for small and medium-sized enterprises applies to enterprises with less than 500 employees and turnover under €100m or a balance sheet total under €86m. This is likely to be most applicable to agencies in the creative and professional services sector.
Companies can claim relief across a range of costs. These include employees, subcontractors (up to 65%), software and consumable items. It cannot be claimed for capital expenditure, land, rates, or commercial activities.
Projects must advance science or technology, overcome uncertainty, and overcome an issue in a professional field. They can include improvement to a process, product or service or original activities in any of these areas.
“It is worth thinking about whether you have something that is original and a genuine first such as a mechanical build. It is becoming a lot harder to claim R&D on software. The key is it needs to be original, said Mark Lowe, founding partner, Third City.
Agencies typically seek specialist financial support to help with the tax relief application process.
“We work with a specialist who has expert knowledge of the scheme. It makes sense to hire someone with the right knowledge and experience. They know what they are doing and what will get approved,” said Kate Hartley, managing director, Carrot Comms, and co-founder of social media simulator Polpeo.
Moore Kingston Smith has published an advisory note on R&D tax relief for the media sector.
According to HM Revenue & Customers £5.3bn of R&D tax relief support was claimed for the financial year 2018-19. This equated to £35.3bn of R&D expenditure. It published a report on Research and Development Tax Credits Statistics in September 2020.
The Manufacturing, Professional, Scientific and Technical, and Information and Communication made up the greatest volume of claims, accounting for two-thirds of claims and 71% of the total amount claimed.
This category includes public relations and communications firms, advertising, and media agencies. Eligible projects include augmented reality, data analytic tools, software development and web design and development.
Research and Development Expenditure Credit is aimed at large enterprises and has similar conditions as relief for small and medium sized companies. It covers 13% of qualifying expenditure.
