While many businesses have been bruised by the ongoing pandemic, some of the most encouraging signs to emerge from this shaken economic landscape are the ways many firms have pivoted their offering to suit new markets and the way many are making a strategic investment in their company. An especially useful tool for supporting a company’s innovation and growth is the Government’s Research and Development (R&D) tax relief schemes. These schemes can be an important source of cash to help businesses invest in innovation and growth.
R&D tax relief rules are broad, and even companies that are claiming this relief might be missing the full potential of the schemes. It is also important to understand the details of the R&D claim in conjunction with the rules of the scheme, to reduce the risk of a future challenge by HMRC to any such claim.
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 far-reaching. It can include:
The development of new or improved products; and/or of new or improved processes/methods. However, R&D can encompass much more – if a company is undertaking activities that are proving to be a challenge, and it is unclear whether the desired solution or outcome will be achieved, those activities may qualify. This relief can be claimed even if a project being undertaken turns out to be unsuccessful.
There are two different R&D tax relief schemes:
- Large company scheme
- Small and Medium-sized Enterprises (SME) scheme
As an example, if an SME spends £100k on its own unfunded R&D, it should be able to claim tax relief for that expenditure, and under the SME R&D scheme, it could also claim further tax relief of 130 percent. So, a further £130k tax deduction which could reduce the company’s tax liability by approximately a further £25k.
Significantly, even if a company is loss-making, it can still claim under this R&D scheme. The scheme is 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. On 1 April 2021 a PAYE/NIC cap was 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). However, there are 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, so a cash benefit of approximately £10k per £100k of qualifying R&D expenditure incurred. SMEs may also claim under this scheme when a particular project doesn’t qualify under the SME scheme. For example, if a project is grant-funded or if the work has been contracted out to the company.
Getting the claim right
If the details of a claim are incorrect a business risks a challenge from HMRC. There are specific categories of qualifying spend that can be included in any claim, including:
- Staffing costs
- Contracted out R&D
- Externally Provided Workers
- Consumables
- Utilities
- Software
- Payments to the subjects of clinical trials
Calculating these amounts can be complicated so it is important to use a reputable, regulated firm of advisors with specialist expertise, since your advisor must be prepared to explain in detail to HMRC why certain projects and expenses qualify.
We have a market-leading R&D claims team and the majority of our clients are owner managed businesses, with an annual R&D spend ranging from thousands of pounds to several million. We enjoy a 100 percent success rate in claims we submit and we minimise the amount of time clients have to spend involved in the claim preparation, whilst claiming the maximum entitlement – so there is low disruption to business operations and minimal risk of an HMRC challenge.
Bevan Buckland LLP is the largest independent accountancy firm in Wales providing practical support and strategic accounting, tax and financial planning advice for small to medium sized businesses.
Paul Arnold is a R&D Tax Partner at Bevan Buckland LLP.
Contact him on: 01792 410110. 07557 503140 or Paul.arnold@bevanbuckland.co.uk