R&D tax regimes - what they could mean to you and your business
17th September 2019
Paul Arnold, R&D tax partner at Bevan Buckland LLP answers your questions about the meaning of R&D and the implications around tax relief
Whether you run an SME or a large company, being tax compliant is imperative for any business. South Wales-based chartered accountants, tax and financial planners Bevan Buckland LLP provides tax and compliance services to individuals and businesses across the UK. Its accountants are specialists in a variety of sectors including property, professional services and agriculture.
At a high level, what is the R&D tax regime?
It is a tax incentive scheme that is designed to encourage companies to undertake research and development activities, or R&D as it’s commonly known. There are two different R&D tax schemes - the large company scheme and the SME scheme. The scheme a company is eligible to claim under will initially depend on the company’s size, that is, whether it is an SME or a large company.
By way of example, if a company which is an SME spends £100k on its own unfunded R&D, not only would it be able to claim tax relief for that expenditure, but under the SME R&D scheme it would also be able to claim further tax relief of 130 per cent, i.e. a further £130k tax deduction may be claimed which could reduce that company’s tax liability by approximately a further £25k.
So, companies can reduce their tax bill by a further £25k for each £100k they spend on R&D?
Yes, under the SME scheme this is the level of additional cash benefit that may be claimed. It’s important to note though that not only does a company need to incur the expenditure, it must also be able to identify that the type of expenditure actually qualifies as R&D, and then claim the available relief.
How does the R&D regime work if the SME is loss making?
If a company is loss making, then it can still claim under the R&D scheme. The scheme is designed to help that company’s cash flow, with a company able to claim tax free cash from HMRC, of up to £33.35k per £100k of qualifying spend.
What about the large company scheme?
Under the large company scheme, a company is able to claim a cash benefit of approximately 10 per cent of the qualifying spend i.e. a cash benefit of nearly £10k may be claimed per £100k of qualifying R&D expenditure incurred.
In addition, it is worth noting the SMEs may also claim under this scheme when a particular project does not qualify under the SME scheme. For instance, if a project is grant funded or if the work has been contracted out to the company by another entity, then potentially the SME may be able to claim under this scheme.
What qualifies as R&D for this purpose?
There is a specific definition of R&D for tax purposes, which is often more far reaching than most people expect it to be. It can be thought of as potentially including the following:
- The development of new or improved products; and/or
- The development of new or improved processes/methods
This is a very simple definition though and R&D can, and often does, encompass many more activities.
Generally speaking, if a company is undertaking activities which are proving to be a challenge, and it is unclear whether the desired solution could be achieved, then it is worth considering whether those activities qualify for this relief.
It is also worth noting that R&D tax relief can be claimed even if a project a company was undertaking was ultimately unsuccessful. As long as the criteria for making an R&D tax relief claim are met, it does not matter that a company failed to achieve its objectives.
What type of expenditure qualifies?
There are specific categories of qualifying spend. These include staffing costs, contracted out R&D, Externally Provided Workers (for instance, agency workers), consumables, utilises, software, and payments to the subjects of clinical trials.
With companies having two years to submit a claim from the end of their accounting period, the qualifying spend in an initial claim can be quite sizeable.
Is this relief only available to certain sectors?
No, the ability to claim R&D tax relief is not limited by sector and a company can claim regardless of this provided their R&D activities qualify. I have clients in a wide range of sectors which range from engineering, construction, manufacturing, medical, food, cosmetic, software, to name only a few.
How involved does a company need to be in the preparation of a R&D claim - what if a company doesn’t have time to prepare such a claim?
One of my key objectives when preparing R&D claims for clients is to minimise the amount of time that their personnel have to spend involved in the claim preparation. I always need input from clients, generally in the initial stages of a claim, but I always ensure this is limited to the minimum necessary. The idea is to make the claim process as efficient as possible for the client, with minimal disruption to their operations, which is why I undertake the vast majority of the work.
Is this work you are prepared to undertake on a wholly contingent basis?
Yes, I am prepared to undertake this work on a wholly contingent basis. That way the company knows there is no cost unless the claim is a success, with my fee being a proportion of the cash benefit derived.
What is your typical client?
The majority of my clients are owner managed businesses, with annual R&D spend ranging from thousands of pounds to several million for the larger organisations. These are businesses operating in a wide variety of sectors.
I also prepare R&D claims for a number of large corporate entities, some of whom are publicly listed companies or private equity backed, for example. In terms of some of the largest claims for instance, one of my clients reduces its tax liability in excess of £7.5 million each year as a direct result of the claims I prepare.
Do you just work in the South Wales region?
Although the majority of my clients are based in South Wales and I am based at our Swansea office, recommendations from clients have resulted in me undertaking claims for clients based in other parts of the UK including the North West of England, the Midlands, the South West and East of England and London.
How long have you been involved in assisting companies with their R&D claim?
The regime was first introduced back in April 2000 and I have been involved since then. At that time, I was working in a Big Four firm and during my last four to five years there I headed up the R&D team for the Wales and South West of England region, and prepared all the complex claims for clients in this locality.
The time I have spent involved in R&D and the more recently introduced Patent Box scheme (introduced in April 2013) has increased steadily over the years such that for the last decade or so nearly 100 per cent of my time has been devoted to these tax regimes.
Finally, what would you say you’re most proud of?
I would say it’s three things. Firstly, my success rate. Every claim I have submitted in the 19 years I have been involved in R&D has been successful, with none of my clients receiving less than the amount of tax relief they were claiming.
Secondly, the loyalty from my clients and the resulting client retention rate. Thirdly, the volume of referrals I receive, with my clients not only referring me to their local contacts but to further afield across the UK also.
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