R&D Tax Credits For Medtech – Could You Be Eligible?
R&D Tax Credits are said to be the single biggest funding mechanism for small businesses investing in innovation – but, surprisingly, many of the organisations eligible for cash grants are not claiming.
Although the initiative was launched back in 2000, we’ve recently had a number of customers asking us about the tax grants, if they’re entitled to apply and how it all works.
So, we’ve decided to debunk the myths surrounding the scheme by talking to the experts. We’ve brought together advice from leading voices in the industry to shed some light on this advantageous scheme.
Illuminating the scheme
First off, we sat down with Sue Nelson, author of The Definitive Guide to R&D Tax Credits and CEO of Breakthrough Funding, a firm that helps innovators get back government money for the work they do.
She believes that misunderstandings of the scheme are its biggest hurdle:
“The main problem with R&D Tax Credits is that the term itself is misleading – it’s a really poor description of the scheme. First off, people don’t understand how broad the definition of R&D is – it’s all about development and innovation and can be anything from software and devices to a new type of peanut butter. Secondly, people don’t realise that what they are being offered is cash – the description implies that only tax relief is available.”
“Tax credit is a ludicrous description, because it means thousands of small companies believe they’re not eligible as they’re not making a profit or aren’t really interested in taking future tax ‘relief’. I like to describe it more simply as ‘cash for innovation’. Once you get beyond the label the deal is pretty simple; there’s cash on offer for business owners who develop software, innovative products or new processes.”
“Although you can take it as future tax relief if you want, it’s not simply a tax credit. Most companies prefer to take it as actual cash instead - you can do this whether you’re in profit or loss. So contrary to popular belief, it doesn’t matter if you’ve never paid corporation tax, or have yet to make a profit, you can still get cash payments.”
Should I be claiming?
To qualify for R&D Tax Credits you’ve got to be a limited company based in the UK with less than 500 employees and less than €100 million (roughly £85 million) turnover a year. You’ve also got to be doing something new and different and it must be scientific or technical and not just an aesthetic or cosmetic enhancement.
The process of claiming is simple – you write a technical report, pull your figures together and submit it to HMRC – they usually process reports within 28 days. On average companies should expect to receive a quarter of development costs back in cash (depending on their tax position).
Sue advocates the advantages the scheme has over other routes to funding:
“Lots of people are looking for funding and often their options come with drawbacks and long-term consequences – with a loan you have to pay it back, with an investor you’re giving away some of your equity, whereas R&D Tax Credits are a way of getting cash in your business quickly and there’s nothing to pay back.”
A common misconception is that it’s a tax avoidance scheme – but in fact the government wants you to claim the money back. It is a government incentive scheme that aims to encourage companies to carry out self-funded development projects - it’s their way of trying to make the UK more competitive and innovative in world markets. By allowing companies to claim for a proportion of the costs they’ve already incurred in developing new products, services or processes, they’ll be able to continue developing innovative products.
Innovator’s insight - Endomag
One company that has first-hand experience of the advantages of R&D Tax Credits is our client Endomag. We’ve worked with Endomag since 2008 and have seen how the scheme has enabled them to continue developing pioneering technologies.
We caught up with Kevin Ellison, Financial Director at Endomag, who told us how it works for them:
“Endomag has been claiming R&D Tax Credits since 2011 - since then we’ve been able to claim it every year. Ultimately, the scheme has provided the cash for working capital to pay our staff doing the research into our ground-breaking products.”
The products Endomag develop save lives. Their innovations include a clinical platform, developed with and manufactured by ITL, which uses magnetic fields in diagnostic and therapeutic devices to improve the global standard of cancer care.
“We’ve done so much R&D that we’ve made a loss - I know for certain that our situation is not uncommon. The initiative allows us to claim back on a loss and re-invest it into innovation. I’d encourage anyone who might be eligible to find out whether they can benefit from the scheme – it’s valuable because in the early stages you are cash hungry. Trading in losses for cash is worthwhile.”
“For us, it’s been a very good scheme. It was very easy to claim – a lot less effort than a government grant. HMRC have been really helpful with our claims – and we’ve never failed to have a successful claim.”
Innovator’s insight - Bedfont Scientific
Another of ITL’s clients who has experienced the benefits of R&D Tax Credits is Bedfont Scientific, a market leader in breath monitoring for medical applications.
Jason Smith, Bedfont Scientific’s General Manager said:
“We first took advantage of the R&D tax credits in 2009. We found out about them via the trade press and since then our accountant has completed our calculations.”
“At Bedfont, we are constantly developing our existing products but also new ones. Recently, the credits have been used for our latest product the iCO™ Smokerlyzer; the world’s first CO monitor for your smartphone or tablet. For the future, we are planning to invest our credits into R&D for our new Helicobacter pylori monitor that is currently in the early stages of development. In 2015 we opted to claim the credit, in prior years, opting for cash enhanced deduction against corporation tax liability.”
“For us the biggest advantage of the scheme is the reduction of corporation tax to be paid, which in turn results in additional funds available for future R&D. We’d encourage any companies that might be eligible to find out sooner rather than later – there’s substantial savings to be made that could significantly benefit their organisation.”
How ITL has benefitted from the initiative
As well as providing a leading medical device development, design and manufacturing service, ITL has its own brand of laboratory equipment; Vitl Life Science Solutions.
ITL has been claiming tax credits for Vitl for a number of years. The scheme has contributed, and largely enabled, the Vitl new product development team to design, manufacture and sell a growing range of world-leading laboratory instruments.
Stephen Hope, ITL’s New Product Development Manager, said:
“We first found out we were eligible for R&D tax Credits after attending a DTI presentation locally. For us, and many of our clients alike, we are breaking new grounds. To qualify, you simply have to be designing something that will advance knowledge, and most, if not all, of our clients are doing this.”
“R&D tax credits take the pain out of the development process – cash injections allow us to move forward with designing new products with minimal pressure. The incentive enables us to keep innovating.”
“Our clients should be claiming when they are pushing forward new technologies. Any customers who want advice on the process can come and talk to us.”
Since 2000/2001 34,000 SMEs have made successful claims and it’s estimated that 90% of those eligible are still not claiming.
It’s thought that misunderstandings or misconceptions about the scheme are the main reasons that the percentage missing out is so high.
Hopefully, we’ve helped to demystify any misunderstandings surrounding the scheme and by now you should have a good idea whether you’re eligible.
Find out more
If you’d like to read up more about the scheme you can claim a free copy of Sue Nelson’s “The Definitive Guide to R&D Tax Credits” book.
Simply email email@example.com and quote the promotional code ITL 2016.