For SMEs the relief has become much more generous in the last few years with the total tax relief increasing to 230% from 1 April 2015. For companies not paying corporation tax there is the opportunity to claim cash back from HMRC. This can be a vital source of finance for technology SMEs. The PAYE/NIC cap restrictions previously applying to this valuable cash source were removed from 1 April 2012, making this relief even more beneficial. However in his 2018 Budget on 29 October 2018 the Chancellor has announced a forthcoming restriction to limit the amount of payable tax credit that can be claimed by a company under the R&D SME
tax relief. The announcement states that the limit will be set at three times the company’s total PAYE and National Insurance contribution (NICs) payment for the period. The change will have effect for accounting periods beginning on or after 1 April 2020. Any loss that a company
cannot surrender for a payable credit can be carried forward and used against future
profits. The Government have said that they will consult on this change.
For a company paying tax, this could currently be worth an additional tax reduction of 24.7% of the qualifying spend, with the corporation tax rate at 19%, up to the amount of taxable profits available.
If the additional R&D tax relief exceeds the available taxable profits then a corporation tax loss is created. There are various options available to an SME in this position as to how it wishes to crystallise the tax benefit:
The benefit to the previously tax paying SME in this case would be a combination of the tax that would have been otherwise payable in the absence of the R&D claim in the accounting period plus any tax reductions from past or future accounting periods and/or the value of any payable tax credit on the surrender of the losses depending on the option taken.
Where an SME is in a loss making position before the R&D claim and the R&D claim further increases the losses then, as set out above, the SME has various options for obtaining relief for the loss.
However where the SME is loss making before and after the claim and the company decides to surrender its enhanced loss in return for a payable tax credit (currently 14.5% of the enhanced loss) then the payable cash tax credit is currently 33.35p for every £1 of eligible R&D spend. This was previously 32.63p for every £1 of eligible spend in the period 1 April 2014 to 31 March 2015. As set out above, the Government’s announced intention to cap the payable tax credit at three times the company’s total PAYE and National Insurance contribution (NICs) payment for the period for accounting periods beginning on or after 1 April 2020 will potentially impact on the benefit received in this way.
For large companies, and SMEs having to claim under the large company schemes, the relief has, until recently, only taken the form of an additional tax deduction of 30% (a super deduction) of qualifying R&D expenditure and, unlike the SME scheme, with no payable tax credit.
This scheme gave a tax benefit of 6% of eligible spend at a Corporation Tax rate of 20%. However this scheme will no longer be available for expenditure incurred on or after 1 April 2016 and will be replaced by the R&D Expenditure Credit Scheme (RDEC) from that date. For expenditure incurred before then, and after the commencement of the RDEC scheme from 1 April 2013, the two schemes co-existed and companies hade the choice to move from the super-deduction scheme to the RDEC. For expenditure incurred after 1 April 2016 only the RDEC scheme will be available.
As this will be accounted for “above the line”, as a reduction in profit before taxation, this is often referred to as the above the line tax credit.
Under the RDEC, for a company paying corporation tax, a credit of 11%,with effect from 1 April 2015 and 12% from 1 January 2018, of the qualifying expenditure is accounted for above the line in the profit & loss account and is deducted from the corporation tax liability. For a company that does not have a corporation tax liability the credit, net of corporation tax, may be payable in cash, subject to a cap based on the PAYE & NIC costs of the staff include in the claim. This could be of significant benefit to many loss making companies unable to take practical advantage of the large company super deduction scheme.
For R&D expenditure incurred on or after 1 April 2013 and before 1 April 2016 a company can elect to receive the new R&D Expenditure Credits (RDECs) instead of the traditional super deduction relief.
From 1 April 2015 the RDEC has a post tax benefit of 8.8%, higher than the 6.0% available under the super deduction route. As noted above from 1 April 2016 the RDEC scheme becomes mandatory for companies claiming under the large company scheme, replacing the super deduction scheme. As the corporate tax rates fall to 19% from 1 April 2017 the RDEC benefit will be 8.91% of qualifying spend for expenditure incurred up to 31 December 2017. For expenditure incurred on or after 1 January 2018 the benefit is 9.72%. The announced fall in the corporation tax rate to 17% from 1 April 2020, and at a rate of 12% credit, would mean that the RDEC post tax benefit would be 9.96% of qualifying spend.
Even if you are not currently claiming then you may well be able to if your technical activities meet the definition of R&D for tax purposes. In practice this can cover a very wide range of scientific and technological activities, much broader than is often realised. There are two key criteria in understanding whether your company may be eligible. Are your development activities seeking to create a scientific or technological advance, and are they doing this by seeking to resolve scientific or technological uncertainty? It is our experience that companies are very often not claiming as much as they could do as there are many misconceptions as to what these key criteria cover. Talk to us to see if you are missing out!
We have extensive experience of assisting companies to identify those activities and associated costs that could be included in a claim giving an uplifted tax deductions or a repayment of cash.
Leading our specialism in this area, John Moore has specialised in assisting companies to optimise their claims for R&D tax credits since the inception of the relief in 2000. He has published numerous articles in the taxation press and on the web and lectured on this specialised area of the tax regime. He is a member of HMRC’s R&D Consultative committee helping to ensure that the relief is targeted effectively. John was previously a Director in, and a founding member of, the ground breaking specialist R&D tax Services team at Deloitte.
The legislation and practice in this area is complex, with many traps for the unwary. We believe the key to optimising your relief is using us to combine a deep understanding of the tax legislation, and our experience of how to identify and robustly support the claim for eligible technological and scientific activities being carried out, together with our ability to communicate proactively and effectively with HMRC to ensure that your claims are agreed. Our aim is to give you certainty over your cash flows and future claim methodology.
Our approach, developed over many years of experience, enables us to work together with your finance and technical teams to:
This is a relief that can provide vital cash flow benefits to technology businesses; can you afford not to optimise your claim process?
We specialise in advising companies of all sizes how they can optimise the R&D tax relief tax benefits available to technology companies. In practice there are a range of services we provide that companies require when evaluating the benefits available:
We can advise on the identification of potentially qualifying activities, preparation of the tax credit claim, preparation of documentation supporting the qualifying nature of the projects claimed, submission of the claim to HMRC, and liaison with HMRC to obtain claim agreement. We recognise that companies may want to perform some, all or none of this in house and we can work seamlessly with your team to provide a solution you feel comfortable with.
Legislation and HMRC practice have constantly changed over the last few years. Your company will have started performing new activities and its structure and complexity may have changed as well. Our review of your claim methodology will provide you with assurance that you are continuing to optimise the benefits available to the company.
We provide advice on ensuring that your claim process is as efficient as possible capturing the right level of information, both financial and technical at the right time. The aim is to optimise the impact of the claim process on the resources of your company.
Many companies want to prepare the R&D tax relief claims in house and we can provide assistance in ensuring that your finance and technical teams are up to speed with the latest legislation and practice. We can provide a range of assistance depending on your particular requirements.
Talk to us – we can help! For advice on R&D tax credits and how you can reduce the cost of your development work call us on 0207 292 8850. To ask us a question online click here.