Paul Arnold, Tax Partner at Bevan Buckland LLP
The Government’s Research and Development (R&D) tax relief schemes are an important source of cash for many businesses to help them invest in innovation and growth.
R&D tax relief rules are broad and many businesses that could claim are missing out. Even firms that are claiming, might be missing the full potential of R&D Tax Relief. And it is important to understand the details of the claim, to reduce the risk of a future challenge by HMRC.
How do the R&D tax relief schemes work?
Any company in any sector can claim R&D tax relief, provided their R&D activities qualify. There is a specific definition of R&D for tax purposes, which is quite far-reaching. It can include 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 encompass many more activities. If a company is undertaking activities which are proving to be a challenge, and it is unclear whether the desired solution or outcome will be achieved, it is worth considering whether those activities qualify for R&D tax relief. Bear in mind that R&D tax relief can be claimed even if a project being undertaken was ultimately unsuccessful.
There are two different R&D tax relief schemes – the large company scheme and the Small and Medium-sized Enterprises (SME) scheme. So, which scheme applies will initially depend on the company’s size. As an example, if 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 percent. So, a further £130k tax deduction may be claimed which could reduce that company’s tax liability by approximately a further £25k. So, under the SME scheme, a profitable company can reduce its corporation tax liability by 25 pence for every £1 spent on R&D.
If a company is loss-making, it can still claim under this R&D scheme. The scheme is also designed to help cash flow, with a loss-making company able to claim tax-free cash from HMRC, of up to £33.35k per £100k of qualifying spend. However, from 1 April 2021, a PAYE/ NIC cap is to be introduced, so the cash a loss-making company can claim from HMRC cannot exceed £20,000 plus three times the company’s PAYE/NIC liabilities (for all company employees). There are, however, certain circumstances where this condition may not apply.
Under the large company scheme, a company can claim a cash benefit of approximately 10 percent of the qualifying spend, i.e. a cash benefit of approximately £10k may be claimed per £100k of qualifying R&D expenditure incurred. 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, the SME may be able to claim under the large company scheme.
Getting the claim right
A successful R&D tax relief claim is a great outcome, but if the details of the claim are incorrect a business risks a challenge from HMRC.
There are specific categories of qualifying spend that can be included in any claim. These include staffing costs, contracted out R&D, Externally Provided Workers, consumables, utilities, software, and payments to the subjects of clinical trials. Understanding and correctly calculating these amounts can be complicated – getting them right is important.
Some business owners wrongly assume they are protected against any HMRC claims by using a third-party financial advisor for R&D claims. It is important that companies use a reputable and regulated firm of advisors with specialist expertise since your advisor must be prepared to explain, in detail to HMRC, why specific projects and expenses qualify for relief. Recent HMRC tribunal cases have highlighted the critical role of advisor testimonies in securing a positive outcome to an HMRC challenge.
At Bevan Buckland LLP we have a market-leading R&D claims team with clients across the UK. The majority of our clients are owner-managed businesses, with annual R&D spend ranging from thousands of pounds to several million, and we have a 100% success rate in the claims we submit. When preparing R&D claims, we minimise the amount of time clients have to spend involved in the claim preparation, whilst still claiming the maximum entitlement. We ensure minimal disruption to business operations and minimal risk of HMRC making a challenge.
For more information, please contact Paul Arnold, Tax Partner on 01792 410110, 07557 503140 or email Paul.arnold@bevanbuckland.co.uk