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 the Chancellor 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. At the Budget on 3 March 2021, following consultation, it was confirmed that the limit will be set at £20,000 plus three times the company’s total PAYE and National Insurance contributions liability for the period and the appropriate amount of those PAYE & NIC staffing costs incurred by connected companies in providing the claimant company with paid for externally provided workers or contracted out R&D activities. The cap will not be applied where employees are creating, preparing to create or managing Intellectual Property (IP) and the company does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons.
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. In future periods where the corporation tax rate may increase, as announced as part of Budget 2021, the tax benefit will be higher.
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. As set out above, the Government’s announced legislation to cap the payable tax credit at £20,000 plus 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 2021 will potentially impact on the benefit received in this way.
For qualifying expenditure incurred on or after 1 April 2016 the old “super deduction” Large Company scheme has been replaced by the R&D Expenditure Credit (RDEC) scheme. 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 a credit of 12%,with effect from 1 January 2018 and 13% from 1 April 2020, of the qualifying expenditure is accounted for above the line in the profit & loss account and, for a company paying corporation tax, 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 immediate cash benefit to many loss making companies.
As the corporate tax rate is now at 19%, the RDEC benefit will be 9.72% of qualifying spend for expenditure incurred up to and including 31 March 2020. Following the increase in the RDEC rate to 13% for expenditure incurred on or after 1 April 2020 the benefit is rises to 10.53%. In future periods where the corporation tax rate may increase, as announced as part of Budget 2021, the tax benefit will be higher for tax paying companies. However for loss making companies claiming a payable credit, the value of the cash payment receivable will fall if and when the corporation tax rate increases in future periods due to the notional withholding based on the corporation tax rate in force for that accounting period.
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.