R&D Tax Credit Overview.
Since being introduced in 2000, the UK R&D Tax Credit scheme has enabled more than 42,000 companies 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.
The SME Scheme applies to 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).
Whilst the exact calculations depend on the profitability / tax profile of the claimant and the amount of work which is subsidised, subcontracted in or subcontracted out an SME can expect to see a net cash saving of up to 30% of qualifying R&D costs and larger companies up to 11%. Claims can be made retrospectively and back dated almost three years (two years from the companies last accounting year end date).
Each year, around 30% of claims come from companies making a claim for the first time and the average claim for SME’s is currently around £46,000. Those SME’s making claims in subsequent years do even better, with companies making six or more claims averaging an annual claim of £61,000. (HM Revenue & Customs, 2015. Working Paper 17 – An evaluation of research and development tax credit).
Despite the number and value of claimants increasing year on year it is still widely acknowledged that many companies that could be eligible may not be claiming – in part attributable to generalist accountancy firms lacking the technical capability to advise their clients on whether their work would meet HMRC’s specific qualifying criteria. This is especially the case in software development where it requires a high degree of technical expertise and experience in R&D Tax Credit claims to differentiate between work which “makes an advance in the field through the resolution of a technical uncertainty” (qualifying) and “complex, bespoke but commercially routine software development” (non- qualifying).
Equally a number of overly aggressive unregulated no-win no-fee consultancies are encouraging clients to claim for any kind of new product development project, resulting in HMRC increasingly rejecting claims which either do not meet the eligibility criteria or lack the supporting documentation to verify such compliance.
The costs that can be claimed are staff salary costs, subcontractor costs and consumable costs, together with an apportionment for energy usage. However, to prepare compliant claims it is necessary to have a good understanding of what aspects of staff time qualify (not all work on a qualifying project is eligible), how the staff time can be verified, what constitutes a consumable and how consumable usage can be verified. It is rare for R&D work to take place solely within the company and whether the external costs (subcontract, external workers, freelancers) can or cannot claim depends upon both the commercial relationships and contracts defining the technical contributions to the project. Finally, how the R&D is financed and especially if end client or grants directly or indirectly fund the work can have a significant effect on whether costs can be claimed and the amount that can be claimed.
Failure to meet the strict eligibility criteria can result in HMRC rejecting claims and even imposing penalties and fines going back for claims up to 6 years. To prepare robust, compliant claims whilst maximising the legitimate claim value requires a combination of technical subject matter knowledge and accounting/taxation skills together with an intimate knowledge of the over 100 CIRD (Corporate Intangibles Research and Development) documents produced by HMRC, together with experience in both preparing many hundreds claims and from the first- hand experience of advising clients through an HMRC Enquiry process.