An Overview of the UK R&D Tax Credit scheme
The UK R&D Tax Credit scheme is a UK Government / HMRC scheme designed to encourage companies to invest in Research & Development
First introduced in 2000, the UK R&D Tax Credit scheme is a UK Government / HMRC scheme designed to encourage companies to invest in Research & Development and has enabled more than 42,000 companies to benefit from nearly £11.5 billion in tax relief and cash rebate for work they have undertaken in developing new products, new production/manufacturing processes and new software / IT developments.
There are two schemes:
- SME Scheme (companies with under 500 employees and either an annual turnover not exceeding €100 million or a balance sheet not exceed €86 million).
- The LARGE Scheme applies to companies exceeding these thresholds as well as SME companies who R&D work is subsidised or subcontracted from LARGE companies, or funded by notified state-aid grants and since April 2013 has been further developed as the R&D Expenditure Credit (RDEC).
What you need to know:
What costs can be claimed?
Costs that can be claimed include the following when spent on qualifying R&D activities:
- Staff costs (salaries, pensions but not dividends)
- Consumable materials costs
- Subcontractor or External workers (different rules for the LARGE / RDEC scheme)
- Energy costs
- Software license costs
Capital expenditure items (new laboratory equipment, etc) cannot be claimed.
Costs associated with the Sales & Marketing of a new product cannot be claimed.
What is defined as ‘qualifying R&D’?
The detailed definition of what HMRC consider as ‘qualifying R&D’ is quite complex but in summary 3 key areas need to be addressed:
- The project should make an advance in an area of science or technology
- The advance should require the resolution of a technological uncertainty
- The resolution of the technological uncertainty should not be obvious to a competent professional
Whilst these requirements may seem onerous, many projects which required some degree of technological challenge outside routine day-to-day activity may potentially qualify.
We have helped hundreds of companies successfully claim from food manufacturers making pies and pasties to actuaries developing risk analysis software.
What if my project was funded by a Grant or subsidised by a client?
Contrary to popular belief, it is possible to claim even if your project has been fully funded by a Grant or if it has been subsidised or fully funded by an end client.
For example, we have made many claims for IT consulting clients who have undertaken all their work on projects which have been funded by end clients.
Where the project has been funded by a Grant/end client the tax saving/cash rebate is less than if the project had been internally funded. There are different rules for SME / LARGE company claims but nevertheless, such claims are certainly possible.
I am a loss-making start-up – how can I benefit?
Under the R&D Tax credit scheme (different for Patent Box), it is still possible to make a claim even if you are loss making and not paying corporation tax. In such cases, you can receive a cash rebate or carry forward losses to be used against future profits.
Whether you are profitable or loss making the process is the same. At the end of the process, since we are also Chartered Accountants / Tax Advisors we can prepare the tax computations and advise you about the options for taking a cash rebate and/or tax saving / carry forward losses.
I am part of a group / UK company with an overseas parent company – can I claim?
If you are a UK company eligible for corporation tax purposes you can still claim. If your work relates to other companies within your group, it may be possible to optimise the claim by considering appropriate recharge, etc. Unlike many other advisors who are not Chartered Accountants / Tax Advisors, we can offer tax planning advice to legitimately maximise the value of claims.
Our project was completed a while ago – can I still claim?
The deadline for making claims is two years from your accounting year end containing the project. Hence depending upon when you are making the claim you can go back 2-3 years.
Is it a complicated process?
We will need a technical discussion to understand the project(s) and which staff/subcontractors were involved. This usually takes 30 minutes for simple projects and 2 hours for larger multi-project claims.
After this discussion, we will write a report outlining the technical advances and how they meet HMRC requirements.
We take basic financial information (accounts, tax comps, payroll and consumable / subcontractor invoice listings) and prepare the financial calculations including the amended tax returns.
You can review and approve the report (unlike many advisors we also give you a copy for your records) and we or your accountant can file at HMRC.
What happens after the claim is submitted to HMRC?
HMRC review the reports and usually within a month or so they will approve the claim by issuing a cash rebate for the claim value (usually the first claims result in a cash rebate even for profitable firms, since the claim is offset against previously paid corporation tax).
Then future claims can either result in a cash rebate or a reduction in corporation tax depending upon your level of profitability/losses and the value of the claim.
What happens if HMRC disputes the claim?
In this case, HMRC will make an Inquiry into the claim. In many cases, these might be simple informal queries which we can deal with directly without the need for a meeting.
In rare cases, HMRC will want to meet and discuss an aspect of the claim in more detail, whilst this may seem daunting, with experienced professional advisors the process is not as intimidating as it might seem and of course we will fully support you throughout the entire process.
Both our Managing Partner and Senior Technical Analyst have successfully defended clients in a number of HMRC inquiries when working at previous R&D Tax Credit advisories.
At May Figures we have never had a client enter an HMRC Inquiry for a claim that was prepared by us.
What about my accountant?
We only act for you for R&D Tax Credits (and if appropriate Patent Box Taxation), with your existing accountant maintaining full responsibility for all your other accounting functions.
We, therefore, are not a ‘threat’ to your accountant, indeed accountant referrals are our biggest source of clients, with accountants steering their clients towards a regulated professional advisory firm that they know will provide their clients with the utmost of professional service.
Unlike many other R&D Tax Credit advisory firms we are Chartered Accountants and Tax Advisors. This means that we can prepare the amended tax computations (first claims) and tax computations (subsequent claims), then deal directly with HMRC, thus relieving your accountant of the need to do this and avoiding you incurring additional fees from them.
How are you paid?
We work on a commission basis – taking a percentage of the cash rebate/taxation saving at the point the claim is approved by HMRC. If a claim was unsuccessful and did not result in a cash rebate/corporation tax saving then no fee would be due.