Regulatory Change and R&D Tax Credit Projects – Dispelling the Myth

Industry regulations are constantly changing, and it is imperative for businesses to react accordingly to remain in compliance. Whether it’s a change in detergent composition to remove regulated chemical compounds or machine modifications to align with new health & safety requirements, thousands of British firms invest enormous sums each year to satisfy new regulatory standards.

A myth we commonly hear is that R&D projects that focus on developing new/existing products, services, or processes for the purpose of regulatory compliance will not qualify against the R&D tax credit (SME) scheme. Some believe that because many other British businesses react to changing legislation in a similar way that their R&D activity will automatically be disqualified. This is simply not true. In fact, Cost Care Tax has claimed back large sums for businesses operating in a range of industries for the regulatory-inspired R&D projects they have undertaken.

The effect of regulatory change on R&D

The effect that new regulations have on R&D and the eligibility of R&D tax credit projects is an underexplored topic worthy of investigation. Regulatory change forces businesses to adjust from their previously stable operation towards understanding the implications of new regulations on their business. Here the company must apply both ordinary (administrative) and dynamic (entrepreneurial) capabilities to thrive and survive by achieving both compliance and innovation.

Many of our clients have developed technologically advanced solutions that have attracted large R&D tax relief rewards due to the need to comply with new regulations and legislative amendments. Those businesses that have invested in the design of new technology or processes for regulatory purposes should speak to an experienced R&D tax credit consultancy as they may be missing out on funds they are entitled to.

We outline a selection of examples where regulatory change in certain industries has resulted in the development of new technology.

The financial sector and ‘RegTech’

Regulatory Technology or ‘RegTech’ is a new label used to describe a set of technology solutions that can be used by firms in regulated industries to help meet their regulatory and compliance obligations. The 2008 financial crisis demonstrated the need for regulation to maintain stability within the UK’s financial industry, leading to the launch of a new regulatory framework operated by the Prudential Regulation Authority.

The RegTech industry is growing rapidly alongside the use of emerging technologies such as cloud computing, application programming interfaces (APIs) and artificial intelligence. Combining technologies for regulatory compliance is more powerful than ever thanks to the proliferation of big data and the reduction in computing power costs.

RegTech and the technologies developed provide regulated businesses with many benefits and opportunities to improve efficiency, automate manual processes, and make effective and compliant use of their data. Once adopted, these technologies can enhance diligence and vigilance in risk management and monitoring and improve the resilience and stability of the wider financial sector.

Undertaking R&D to accommodate strict regulatory frameworks is replicated in other regulated sectors too such as legal, government, gambling and gaming, healthcare and energy to reference a few.

Food & drink industry

Recently, we have witnessed increasing pressure from regulators to encourage producers to make food; cheaper with longer shelf lives, ethical, organic, free-from certain ingredients, and healthier.

For example, the Soft Drinks Industry Levy or ‘Sugar Tax’ was announced in 2016 which places a levy on beverages depending on their sugar content. For instance, a levy of 24p per litre is applied to drinks containing 8 grams of sugar per 100ml, and 18p per litre for a sugar content of 5-8g per 100ml.

In response, R&D departments have reformulated their sugar sweetened beverages (SSBs) to reduce their sugar content while preserving taste and consumer experience. This equates to a reduction of 45 million kilograms of sugar consumed per year which will help reduce the risk of tooth decay, obesity, type 2 diabetes, and cardiovascular disease among the UK population.

Construction industry

Following the Grenfell Tower disaster in 2017, The Building (Amendment) Regulations came into force which banned the use of combustible cladding/materials anywhere on external walls of high-rise buildings over 18m.

Businesses developing non-combustible building materials have undertaken R&D projects to develop new cladding, insulation, material, and installation solutions to comply with the stricter rules. Creating new construction materials and cladding systems is a hotbed of innovation with real-world safety implications. Underpinning this growth are the trends of high-density urban living and mixed-use developments which drive demand for sustainable cladding and insulation products that perform across thermal, acoustic and fire safety requirements.

Automotive industry

From 6th July 2022, all newly launched cars sold in the UK must be fitted with a speed limiter called an Intelligent Speed Assistant (ISA) which uses GPS data and/or traffic-sign-recognition cameras to determine the maximum speed allowed in an area. The system then limits the engine’s power and the vehicle’s speed to that limit.

The new regulations will require OEMs and supply chain partners to undertake R&D to develop new vehicles, electronic systems, and engine management systems to satisfy the ISA regulation.

Additionally, the government will look to ban the sale of new petrol and diesel cars from 2030 to encourage electric vehicle (EV) take up. Such regulations provide a large incentive for car manufacturers and supply chain businesses to accelerate their EV development timelines and seek technological advancements prematurely.

Agriculture industry

The farming rules for water regulations (2018) (FRfW) were introduced to create a national baseline for good farm practices and to reduce/prevent agricultural diffuse pollution in the UK. The regulations outline steps to prevent manure, fertiliser, and soil from entering watercourses – also known as diffuse water pollution.

British farmers must consider how the rules apply to their farming and horticultural practices, including how organic manure or manufactured fertiliser is used and stored, planting & harvesting, soil management, and livestock management.

Large and small agriculturists alike have conducted R&D to develop solutions to minimise the risks and effects of diffuse water pollution. For example, the design of new slurry storage management systems that account for the risk of run off and soil erosion, while considering slope angles, ground cover, distance to natural water courses, soil type, and weather conditions.

Software industry & GDPR

The General Data Protection Regulation (GDPR) was launched in 2018 and was a long-planned EU-wide data protection reform designed to ‘harmonise’ data privacy laws across all member states and provide greater protection and rights to individual consumers. Large fines and reputational damage can result for those businesses found in breach of the regulation, which replaces the Data Protection Act 1998.

The strongest data rules implemented to date, they enhance how consumers can access information about themselves and limit what businesses can do with the personal data and for how long.

GDPR affects all businesses handling customer data and significant R&D investment has resulted to produce new data systems and handling processes to remain in compliance. The regulation forced many businesses to examine the data they held in disparate silos and to implement processes to organise, classify, and tag content. As a result, organisations have streamlined their workflows in order to better handle their own data sprawl.

Don’t miss out on the R&D tax relief you are entitled to

Many businesses that have invested in R&D to develop new or modify existing products, services, or processes to comply with new regulations are not aware they may be eligible for R&D tax credits. Seemingly small regulatory adjustments such as chemical ingredient exclusions or new health & safety guidelines can often require enormous R&D efforts on behalf of British businesses.

Having claimed back over £85 million in R&D tax relief for thousands of UK businesses, our tax experts are well placed to advise whether your R&D projects satisfies the R&D Tax Credits (SME) criteria set out by HMRC. Call us today for a no obligation exploratory conversation with one of our tax experts.

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What our Clients Say...

We have referred tens of clients to Cost Care Tax over the past 7/8 years and all have been impressed with the professionalism and efficiency of their team. The support in relation to R&D tax claims is unrivalled and exceptional and we highly recommend them. Thanks to Wayne, Paul, Tom, Ben and the rest of the team
Even as a small business (10 employees), we spend significant amounts on R&D projects both in time and materials. Cost Care Tax has managed our R&D Tax Credit claims for the past 7 years, and in that time we’ve found their professional approach has made the process rewarding, straightforward, and painless.
Cost Care Tax has always been there to help us understand what is claimable and what isn’t, and provide us with an easy to use document for recording R&D projects. The submission reports they write are very thorough, and once approved by us they deal directly with our accounts in submitting the claim to HMRC.
Cost Care Tax's services were recommended by a larger contractor who had dealt with Cost Care Tax for various accounting and tax purposes. Needless to say we were not disappointed and they lived up to their recommendation with a high level of professionalism and attentiveness.
As a smaller contractor we can rarely afford the time nor the internal personnel to carry out the abundance of R&D paperwork involved in tax credits. Cost Care Tax takes that pressure away and carries the burden both with complete care and within a decent time frame.

Cost Care is here to support accountants and your clients - call our team of experts today and refer your client …

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