Research and Development Tax Relief
Article featured in Fashion Rider’s Fashion & Finance Report, October 2018
Tax relief may not be something that the average fashion industry business has considered, but it can be of huge benefit to any organisation that develops its own products and concepts.
In this report, we examine why research and development (R&D) is encouraged under the tax system, what it can mean to your current investment in R&D, and the potential upside from the point of view of your tax liability.
If you’re not making profits, you can even get back tax you haven’t paid in the first place – providing funds to invest in your business.
Bear in mind that the rules surrounding R&D tax relief are designed for all sorts of businesses – not just those engaged in the fashion industry – but they are especially useful to any operator in the creative sector, because so much of what is made in fashion needs to be developed, often entirely from scratch.
Tax Relief for Research and Development
The government wants to encourage a dynamic economy with innovation at its core. It sees R&D that is conducted by small and medium enterprises (SMEs) to be the focal point of this and, consequently, tries to encourage more SMEs to invest in their R&D activities. The government’s approach is to provide financial incentives for doing so, called R&D Tax Credits. As something that will be of interest to any owner or financial director in a fashion-based industry, R&D Tax Credits mean that the annual tax bill that you pay to HMRC is reduced according to how much expenditure you can demonstrate has been spent on R&D.
So, for example, if you have been working on new textiles, developing an entire product range for a specific market overseas, or have been researching the longevity of your products over a given number of washing cycles, then you could qualify. Think about it: anything that is spent on researching or developing your current or future offerings may be liable for tax credits which means your business’ financial position could be vastly improved. Up to 26 per cent of your R&D expenditure can be claimed back under the system if your business is profitable. If you happen to be running at an operational loss for a given financial year, then up to 33 per cent is allowed under the scheme.
Some people mistakenly believe that you need an R&D department, such as one you might find in a large, multinational technology business, to take advantage of these perfectly legal tax breaks. In fact, the government offers them to all businesses, including SMEs in the fashion industry, because it wants companies to innovate more. In other words, the authorities want you to spend more on R&D, to get ahead and to grow your business in order to, ultimately, pay more in tax down the line as a successful, world-beating operator. Why not take advantage of this?
Benefits for Your Research and Development Activities
Knowing that you can effectively claim a lot of your R&D expenditure back from HMRC under the tax rules should encourage you to do more in terms of fashion development. After all, there is a high importance placed on progress within the fashion sector. There again, you might want to research how you can align your business with something which is having a disrupting effect within luxury fashion, such as the rise of 3D printing, for example.
To stay one step ahead of the competition, you need to innovate and this is where tax credits for R&D come in. Essentially, investment in innovation and advancement can provide your business with future growth and success, whilst you earn government money back to keep your flow of creativity going.
Operating in a Tax Efficient Manner
As well as the undoubted benefits to your business of putting more into R&D, the tax credit rules mean that you may be paying more tax than you need to at present. This is where you could benefit from the expertise of a specialist tax advisory business such as Beavis Morgan. If you don’t know what HMRC considers legitimate spending on innovation and research and what it does not, then you can’t take advantage of the full allowances and, thereby, reduce you tax liability to its optimal level. Such advice pays for itself since it enables you to lower your tax bill, while successfully creating a more viable structure for your business; one that is based upon harnessing your innovation, readiness to engage in cutting edge technologies and sheer creativity.