Updated: Jun 25, 2021
This article was originally published in Blockchain Industry Review - a Crypto Curry Club Magazine published monthly and available in soft copy and the printed version.
Written by Guest Contributor, Shaun Bartle,
Associate Director of Accounting Firm, Finch & Associates
So, what does this have to do with saving your business on tax? The UK Governments Research & Development Tax Credit Scheme! This generous tax-saving scheme allows companies who are innovating to reduce their corporation tax burden and potentially receive a game-changing cash injection to the business.
The scheme does, on the face of it, sound too good to be true, but I can assure you that is not the case. The scheme is a Government incentive that rewards UK companies for pushing the boundaries of innovation and help to fuel growth in the UK, making a claim can potentially provide a valuable cash injection into the business and reduce your corporation tax bill.
To qualify, a business must be seeking an advance in science or technology, and when trying to achieve this, encounters scientific or technological uncertainties that are not readily deducible by an expert in that given field.
A loss-making company which qualifies for the SME scheme can potentially recoup up to 33p in every £1 spent on qualifying R&D activity (more on this later), whilst a profit-making company profit-making company can potentially reclaim up to 26p in every £1 spent.
How Does This Relate to Blockchain?
The core value that underpins Blockchain is that it acts as a consensus mechanism that enables a database to be directly shared without a central administrator, essentially cutting out the middle man.
Not only this, Blockchain offers businesses advantages such as trust, transparency, efficiency, reduced transaction costs but with faster transaction settlements, and with the pace of technology moving faster than ever before, it was inevitable that technology such as Blockchain would begin to become “the next big thing”, no doubt being helped by the crypto-craze we’ve been encountering with its various highs since 2017.
The number of companies exploring the use of Blockchain and actually integrating it into their day-to-day operations has significantly increased. This has led to higher volumes of R&D claims being made where companies are innovating with Blockchain.
So What is the Benefit of Doing an R&D Claim?
Credit where it’s due!
SME’s can claim an additional 130% deduction of the qualifying expense incurred
Whether you are profit or loss-making, you may still be eligible for the relief, with up to 33p in every £1 spent on qualifying R&D activity potentially being recovered.
A Tax Credit is an immediate source of cash which you can reinvest in your R&D and continue to lead innovation.
As an example, let’s assume a profit-making company qualifies for the SME scheme and their Tax Advisor has identified £100,000 of qualifying R&D expenditure for the period. The potential benefit could be a tax refund or reduced tax liability of £24,700, broken down as follows:
£100,000 x 130% (enhancement rate) = £130,000 (known as your enhancement
£130,000 x 19% (current Corporation Tax rate) = £24,700
Now let’s see what the potential benefit could be if that same company were a loss-maker instead:
£100,000 x 130% (enhancement rate) = £130,000
We then add this to the original expenditure:
£100,000 + £130,000 = £230,000 (known as your enhanced expenditure)
£230,000 x 14.5% = £33,350
The 14.5% is known as the “surrender rate”, as the business is essentially giving up their loss for an immediate cash injection instead.
The average claim made by an SME company in the 2016/17 tax year was £53,876. With benefits like this, it’s easy to see why claiming R&D tax credits could help transform a business around!
What Costs Qualify as R&D?
The cost of staff directly involved in the R&D work.
Some Software & Consumable items.
65% of the cost of third parties who worked on the R&D projects.
Grants – You can still claim R&D tax relief if you have received a grant.
Blockchain Case Study
The increasing use of Distributed Ledger Technologies (‘DLT’) such as Blockchain to record real estate transactions has led to an increase in R&D claims for Property Investment companies.
The R&D is usually integrating an existing CRM system with the DLT. As the Intellectual Property vests with the business and is usually kept as a trade secret, the knowledge that is available in the public domain is scarcely limited.
This results in specialists creating and advancing a new integrated platform that is more efficient for the business.
To emphasise the impact that Blockchain is having in Real Estate, HM Land Registry themselves are currently exploring how Blockchain technology could be used to provide quicker and simpler services at the Government level.
So What's Next?
If you are adopting Blockchain within your business and integrating it with your existing systems, or innovating via another method, you should contact your Accountant or Tax Advisor as soon as possible to discuss whether or not you qualify.
It’s important that you act sooner rather than later, as claims can only be made within the 24 months after your year-end.
Remember, this could help transform your business around, freeing up cash quickly to enable you to continue to innovate and further growth.