For innovative, forward-thinking businesses, now is a good time to consider R&D tax relief. If you qualify, here is how to claim tax credits successfully, writes Simone Dalton, R&D Tax Specialist at Goringe Accountants.
The number of R&D tax credit claims is rising, with £3.5bn claimed between 2016/2017 – money that stimulated further R&D investment worth £8.2bn according to latest HMRC statistics. But whilst SMEs are taking advantage of this relief, the majority are still only making relatively small claims with 75% claiming less than £50,000.
R&D reliefs support companies that work on innovative projects to push the boundaries in an area of science or technology. It can be claimed by a wide range of companies in many different industries and even on unsuccessful projects.
Profitable SMEs can use it to reduce their tax liabilities by 25% of their qualifying costs and loss-making SMEs can claim a tax credit cash repayment of up to 33% of their qualifying costs – making it a very generous relief worth considering.
Even SMEs receiving R&D funding can claim a net tax credit repayment worth 10% of qualifying costs.
Yet many companies still don’t realise that they qualify for relief. A project must aim to advance an area of science or technology through the resolution of scientific or technological uncertainties (with the R&D work carried out by competent professionals).
What companies don’t realise is the wide-reaching definition of an advance in science or technology which includes – appreciably improving a product or a process, taking known technology and adapting it for a different use, and combining known technologies in a novel way.
A competitor may already have achieved the technological advance that you are seeking but if the know-how behind their development is not public then you can still claim tax credits.
And, it’s not just for high tech or scientific businesses – construction, architecture, food science, packaging and brewing are just some of the industries that commonly succeed.
For example, a globally competitive manufacturing business that has been around for more than 30 years will be doing something to stay competitive like continually improving its processes or quality of products, therefore likely to have qualifying R&D.
The claims process
An R&D tax relief claim is made on a company’s corporation tax return and should be accompanied by a supporting R&D report.
HMRC aim to process an SME tax credit claim within 28 working days from the date of submission. Each claim is reviewed by an HMRC officer and they either approve it or open an enquiry for further information.
The report is very important – the document should be produced in an HMRC friendly format and in simple and clear narrative demonstrating how a project(s) has met the qualifying criteria, as well as addressing anything in the accounts or tax computation that may not be clear to the reviewing officer. It must essentially answer all of HMRC’s questions.
HMRC encourage companies to make claims but require them to follow the correct legislation and guidance and be presented clearly, so getting good advice is important to strengthen your claim.
Pitfalls to be avoided include:
- Poor reports could lead to an HMRC enquiry which can take months to resolve
- Erroneous claims could result in penalties up to 100% of the extra tax due
- Interactions with group companies can affect the potential to make a claim – care should be taken when recharging R&D costs from one group company to another, it is possible to render otherwise qualifying costs as ineligible, for example; where a director’s staff costs are recharged from one company to another and she is a director of both companies, these costs would not qualify as ‘staff costs’ or ‘externally provided worker costs’
- When an SME receives R&D funding towards a development project or if a qualifying project has been subcontracted to the company, then at least some of the qualifying costs can no longer be included in the SME tax relief claim, but they may still qualify under the less generous ‘Large Company’ R&D Expenditure Credit (RDEC) scheme
There are various niche firms springing up advising on R&D claims with many different fee structures. A contingent (no win no fee) structure is convenient and can work well but be careful on what the % fee is based on; under the RDEC (R&D expenditure credit) scheme which amounts to a net credit of 10% of qualifying R&D expenditure, a 25% contingent fee based on the tax relief achieved would be about half the price of a 5% fee based on qualifying costs.
Don’t get tied into a multiyear contract – I’ve had two recent cases where companies have wanted me to advise them, but they’re tied into a contract for a few years, with an uncapped contingent fee.
Rising claims have recently forced HMRC to change the set-up of their R&D units and how they correspond with clients and advisors. Having professional help will smooth the process but if you go it alone, ensure to be on top of the numbers and keep up with HMRC’s latest guidance. The supporting R&D report is key to achieving a successful claim.
HMRC’s new and improved guidance for SMEs can be found on GOV.UK.
Simone is a Chartered Tax Advisor with more than 20 years’ tax and accountancy experience, with a respected reputation with HMRC and a 100% success rate on 100s of R&D tax relief.
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