Robson Laidler’s client manager Jack Spoor takes a closer look at R&D tax credits….
HMRC has anecdotal evidence suggesting that up to 200,000 qualifying companies in the UK fail to claim research and development relief, be they SMEs or large businesses.
For SMEs this could result in forgoing a corporation tax credit of up to 33.35% of any qualifying R&D expenditure.
When you think of research and development, people tend to think of men in white coats experimenting in laboratories with test tubes, however this is far from the truth.
In reality, R&D can take many forms, some of which can be surprising. It is important to bear in mind that the relief is awarded to specific projects as opposed to the wider industry in which your business operates.
THE FIVE KEY AREAS
To establish whether a research and development claim is possible, you must consider five key areas:
- Advance– Are you seeking to improve the overall GLOBAL knowledge in your field (not just your firm’s)?
- Uncertainty– Are you trying to overcome a scientific or technological uncertainty in your business or field as a whole?
- Science & Technology– Are you performing a systematic study of nature & behaviour of the physical and material universe? Or the practical application of scientific principles and knowledge.
- Project – Are you undertaking a specific project to advance overall knowledge or capability in a field of science or technology?
- Activities– Are you innovating new technology to an existing uncertainty or adapting existing technology to a different uncertainty?
WHAT COSTS CAN BE CLAIMED
The costs that can be included in a R&D claim are very specific. These include:
- Direct Staff Costs– The proportion of staff salaries, NI & pension contributions that is committed solely to R&D work. This includes scientific or technological design, testing and analysis. As well as some planning activities and software development.
- Indirect Staff Costs– The human cost of the support services and training that relate solely to R&D work. E.g. Staff cost of payroll clerk preparing wages for R&D staff. Note that only staff costs can be claimed as opposed to actual costs incurred (such as cost of training course).
- Subcontractors– The costs incurred to engage a third party to perform the R&D work. This is restricted to 65% in the relief calculation.
- Consumables & Materials– Cost of materials, software consumables & utilities incurred as result of R&D.
- Expenses– Expenses incurred by the employee in order to perform R&D work.
The company must have lower than
- 500 Employees
- €100m Turnover
- €86m Balance Sheet
- The relief entitles the company a deduction of 230% on qualifying expenditure, i.e. an additional 130% on top of the expenditure recognised in the financial statements.
If this creates a tax loss, then the company has a choice of:
- Carrying the loss forward
- Surrendering loss to group undertakings
- Exchanging the loss for a cash repayment from HMRC at 14.5%
Qualifying expenditure per accounts: £100,000
Multiply by 130%: £130,000
Total enhanced expenditure: £230,000
If this is part of an overall tax loss, then a tax repayment can be reclaimed as follows:
£230,000 x 14.5% = £33,350
The relief can be only claimed on qualifying expenditure. This is defined as costs:
- Deducted in profit & loss
- Capitalised R&D revenue expenditure
- Relevant to trade
It also must not be:
- Incurred on activities contracted out to the company.
- Subsidised via state aided grants (this excludes EU or private sector funding).
DEADLINES FOR CLAIMS
Claims must be made within two years of the end of the accounting period.
ADVANCED ASSURANCE PROCESS
If the company qualifies as small for R&D purposes (turnover <£2m and employee numbers <50), and is making its first claim, then you may be able to benefit from the AAP.
This allows your claim to be pre-approved by HMRC prior to submission to ensure it complies with their guidelines. Upon its approval, HMRC will also guarantee that the first three years of claims will not be queried.
IF YOU HAVE ANY QUERIES REGARDING RESEARCH AND DEVELOPMENT RELIEF OR WISH TO ENQUIRE INTO WHETHER YOUR BUSINESS CAN QUALIFY, THEN PLEASE CONTACT JACK SPOOR: JSPOOR@ROBSON-LAIDLER.CO.UK