In our experience, many companies are still under-claiming on the R&D tax relief that is due to them; and, in a surprising number of cases, not claiming at all when they should be. The aim of this article is to highlight some of the practical issues that you should think about before starting your claim process, no matter what the size of company and R&D operations. This article will not attempt to explain the intricate workings of the three schemes currently available. It will highlight the benefits you could be missing out on and suggest some tips on a basic methodology for approaching the claim process to stand the best chance of optimising your claim benefits.
If you have been involved in the preparation of R&D tax relief claims then you will probably be aware of just how complex this can be in all but the smallest and simplest of claims. If you are thinking about making a claim for the first time then you are about to find out!
In the absence of outsourcing the work to the company’s external accountant or other specialist adviser, the preparation of the claim usually becomes the responsibility of the finance team. If we presume that this is you, and that the company wants to optimise its claim, you will need to be in a position to balance the amount of resource required to calculate the relief with the value that the company will receive as a result.
In order to be successful you will need to be prepared to navigate your way through a complex interaction of accounting procedures and several sets of tax legislation, and be able to fully understand the nature and extent of the potential for the company’s scientific and technical activities to qualify for the relief. In addition you will need to be able to support your process with documentation that will demonstrate to HMRC that your claim is robust and correct as part of the filing of the corporation tax self-assessment process.
Since the relief was introduced in 2000, there have been very few years when one or other of the forms of R&D tax relief have not been tinkered with by the Government. This has, in general, been a process of constantly improving both the benefit of the relief to companies and the guidance on how to apply the complex legislation and practice in this area. As a result however, it is easy to overlook activities and costs that could be included in the claim, or conversely to claim for ones that do not qualify. You need to be sure that you are optimising your R&D tax relief claim process and that the benefits that can be achieved.
What benefits could you be missing out on?
There are now three R&D schemes in place that companies may be eligible for, mainly depending on whether they are an SME or a large company. However there are often circumstances, including the receipt of grants and performing R&D that is subcontracted to the company, when a company that looks like an SME is not able to claim under the SME scheme and is instead forced to claim under one of the two schemes currently in place for large companies.
For companies able to claim under the SME scheme the benefits have increased over the years and, as announced in the Autumn Statement in December 2014, the rate of relief will increase to an additional 130% tax deduction for expenditure on or after 1 April 2015.
- For a tax-paying company this means the reduction in tax payable is worth 26% of the qualifying spend.
- For a company that is not paying tax there is the potential to surrender the losses for a cash payment from HMRC, and this could be worth up to 33.35% of the qualifying spend.
For companies not able to claim under the SME scheme there is now the choice of one of two schemes to claim under.
The large company scheme allows a company to claim an additional 30% super deduction. From 1 April 2015, all companies will be paying corporation tax at 20%. The benefit under the large company scheme is therefore an additional 6% of the qualifying expenditure for a tax-paying company. This scheme will be phased out for expenditure on or after 1 April 2016 when the new R&D expenditure Credit (RDEC) relief becomes mandatory. From 1 April 2013 until that time, companies can use either of these large company schemes.
The taxable credit available to companies claiming under the RDEC regime has been increased from 10% to 11% providing an after-tax benefit of 8.8% of the qualifying R&D expenditure. Under certain circumstances, companies not paying corporation tax can obtain some or all of the credit as a cash payment from HMRC.
It makes sense to ensure that you are claiming as much as you are entitled to as these amounts are generous and affording reduced corporation tax payments and a valuable source of additional cash for qualifying companies. They are also part of the normal compliance process which the Government fully intend companies to take advantage of and are not associated with any of the tax avoidance schemes so often highlighted in the press.
The key reason why companies miss out
It’s because it’s really quite complex! With three different schemes to consider and some different computational rules for expenditure under the large and small schemes, it can be difficult even for large companies with sophisticated in-house tax resources to get this right. For SMEs who can face many complex considerations, including which scheme they should be claiming under, there can be significant benefits that go unclaimed. Often the smaller companies facing the most pressing need for additional cash flow assistance are most likely to miss out because of the complexity involved in making a full and robust claim.
Here are seven ways to optimise your R&D claim process:
1. Start with understanding the R&D projects you are carrying out and then look at the activities involved and the associated qualifying costs. This way you will build your claim fully and robustly from the “bottom up”.
2. Identify and involve the key members of the scientific and technical staff at the beginning of the claim preparation process so that they can identify the qualifying projects and all the associated activities and qualifying costs.
3. Ensure the company’s scientists or technologists really understand the definition of qualifying R&D for tax purposes so that they are in a position to be able to correctly consider all the potentially qualifying projects.
4. For each project you should be able to demonstrate how the project qualifies according to the criteria laid out by HMRC. What is the scientific or technological advance that the project is seeking and what are the scientific or technological uncertainties that you are resolving as part of the project? If HMRC enquire into the claim then they will require this information. Many companies present this information as part of the tax return and do not wait for an enquiry. If you are claiming a payable tax credit then this could ensure that this is received as soon as possible.
5. You will need to understand the range of qualifying costs applicable to each of the three schemes. It seems an obvious point, but where claims are prepared where the basics and the many complexities have not been properly understood, it leads to amounts being under-claimed or the potential for a penalty to be levied by HMRC for an incorrect tax return where non-qualifying amounts have been included.
6. Ensure your financial systems are capable of generating the information required to complete the R&D claim process in a more timely manner. This is something that many companies are starting to do. Larger companies will often seek to calculate and track the likely size of the R&D claim as the year progresses for management accounting and reporting purposes. For SMEs that perhaps rely on a speedy claim process and payment of any tax credit, the ability to speed up the preparation and filing cycle is crucial.
7. Consider whether obtaining an independent review of your claim and the preparation process could be productive. The legislation and practice around R&D tax relief has changed frequently over the years. The use of a “standard” process involving a spreadsheet model, and standard inputs used from year to year may not optimise the claim and can introduce errors. In practice the R&D process will be a moving feast with the nature of the activities, the various parties involved and the associated costs changing over time. These, and the complexities of the reliefs, need to be understood if you are to make the most of the intended benefits afforded by the legislation.
The above paragraphs highlight some of the issues and best practice in this area. There are many pitfalls for the unwary! Depending on the circumstances of the company, the interaction and operation of the legislation can be very complex. Each claim really requires a bespoke approach to ensure that the company achieves the right balance of benefits obtained compared to the resource levels required to achieve them. In our experience, most companies recognise that there is a commercial decision to be made. Upfront planning and effective review can really make a difference.
How can we help you?
Kingly Brookes specialise in providing clients with a bespoke service to enable them to optimise their R&D claims. Our deep experience of the practical and legislative issues enables us to advise our clients in a number of ways dependent on their level of ability, experience and need in this area. We provide support throughout the whole claim process, or elements of it, for a very wide range of companies from small start-up companies to multinational groups, every time proving the value of our advice. In the last two years alone we have assisted our clients to claim additional R&D tax relief in excess of £45m.
Please do not hesitate to contact John Moore on 0207 292 8850 or at firstname.lastname@example.org if you would like to discuss how we could assist your company.