R and D Claims - Your Questions Answered
R&D Tax Relief is available to UK limited companies, using science or technology as part of an innovative process/product. The technology must be innovative; being commercially innovative is not enough.
There are two variants of the scheme – large company (RDEC) and small company. Small companies that have received subsidies or grant funding may need to use the large company scheme.
The small company’s scheme is much more beneficial – paying the company upwards of 19% (typically 24.75%, maximum 33.35% depending on taxable profit/loss) of qualifying R&D costs. The large company scheme typically benefits by just under 10% of R&D cost.
The specific questions an R&D consultant answers to demonstrate a qualifying project varies. The basis is the key points in the BIS Guidelines. Good questions to consider include:
- what was the advance in knowledge or capability in an area of science or technology that was being sought?
- what was the baseline in the science or technology from which the advance was sought or in what way does the project go beyond what was the current state of knowledge or capability?
- what the R&D project was and if relevant, what the larger commercial project was?
- the particular scientific or technological uncertainties that needed to be resolved to seek the advance?
- why the knowledge or capability sought was not readily deducible by a competent professional in the field?
- when the particular uncertainties were overcome?
- how were the uncertainties overcome?
- why were the uncertainties not readily deducible by a competent technical professional in the field?
- what costs are associated with resolving the uncertainties? Are those costs qualifying?
You need to understand the context of the HMRC Guidelines to fully understand these questions. They are about more than just an individual understanding of the words. The Guidelines are lengthy and don’t even clearly explain every term but explain many of them; but if you do understand them and can describe an overall advance in a field of science or technology being attempted, and the associated scientific or technological uncertainties, you have the basis of an R&D claim. Our experienced Consultants will help simplify the process as much as possible and can relate the Guidelines to your specific industry sector and business activities.
Yes, under the SME scheme loss making companies can claim and have the choice of either a payable R&D tax credit or carrying a loss forward.
For a large company or a small company claiming under RDEC, a loss-making company can claim an RDEC. A payable RDEC is calculated based on several caps and offset. Providing a loss-making company has enough PAYE on R&D staff to cover the RDEC amount an RDEC will be paid. If it does not RDEC can be used for other tax liabilities or group relief. If RDEC remains after these offsets it is carried forward to the next year and the same steps are repeated. RDEC is more straightforward for companies where the corporation tax due is greater than the RDEC as the RDEC can be used to offset CT due or already paid.
This is well covered in our section on “benefits” under R&D Tax Claims. We suggest trying our estimator tool. In less specific terms for years where the corporation tax rate is 19% a claim that just generates tax relief is worth 24.7% of qualifying costs, and R&D Tax Credit Claim is worth between 18.85% & 33.35% depending on the tax position, and RDEC is worth 9.72% assuming it is payable after caps and offsets.
HMRC do not have a KPI for claims involving tax relief, payment times depend on the processing speed of your Corporation Tax Office. These are generally good, and 4-6 weeks is not untypical. For an SME payable R&D Tax Credit the KPI is 95% in 28 days. HMRC, in recent years, 2018 & 2019, have not been achieving this and claims have been taking 12-16 weeks to get paid. No KPI exists for RDEC and recent processing has been very slow.
HMRC are trying to improve processing times and we do get a weekly email on those times from HMRC through our RDCC membership. HMRC can make checks on claims and this process does delay payment until they are satisfied with the claim detail. In some circumstances they will release interim payments as part of that process.
In most circumstances. But under the SME scheme if existing losses or other reliefs, group or charity for example, have relieved profits then all an R&D claim might to is replace those reliefs. It is important to consider the specifics of the tax position early in an R&D claim to see if a claim will be worthwhile in cash terms. Sometimes increasing/preserving losses can be as valuable as gaining cash if those losses can be used for tax relief. Under the RDEC steps involving caps and offsets it is possible that all a claim will do is create an RDEC to carry forward. Turning this into cash will depend on future years calculations through the RDEC steps. RDEC will always be cashflow positive for profitable companies as step one is offset against corporation tax.
To be an SME a company must pass two tests.
1. Under 500 employees.
Pass move to test 2, fail you are a large company for R&D purposes.
2. Below one of the following. Balance sheet €86 million and turnover €100 million.
Below on one or both thresholds you are an SME. Over on both you are a large company.
The picture is slightly muddied by the fact that linked and partner enterprises may have to be included and in some places different types of owning companies or individuals are treated differently. A specialist helps with fully understanding these rules and definitions.
The flowchart from HMRC is a useful starting point in finding out what should be considered.
If the change is organic the status does not change until the second year where it has also been achieved. So, if an SME organically becomes a large company in year 1 and is also a large company in year 2 it could make an SME claim in year 1 and would need to claim under RDEC is year 2.
If the change is due to a takeover or sale of a group company the change in status is immediate.
We always recommend that an SME being taken over by a large company should consider shortening an accounting period to the day before the takeover to get the benefit of being able to make an SME R&D claim for the period before the takeover. What matters is where a company is in terms of the SME test thresholds at the end of an accounting period.
One of the key conditions to be satisfied is that a company is trading as a going concern. If a company is liquidated or its registration ceases it cannot make an R&D claim. If any control can be exerted over these matters for example absorbing a bought limited company, it makes sense to make the R&D claim before the status is changed otherwise the opportunity is lost forever to claim.
The key issue is: “is the entity subject to UK corporation Tax”. LLPs don’t pay corporation tax, and charities are normally exempt. Some categories of not for profits do qualify like Community Interest Companies who would pay Corporation Tax on profits if they made them.
To claim an entity must be subject to corporation tax. Sole Traders and Partnerships made up of individuals do not qualify.
A joint venture/partnership made up of limited companies would qualify but the individual limited companies would claim depending on how the costs were split in the partnership.
No. Companies in a group would claim as limited companies. Group relief might be a factor to consider in calculating the claim benefit. Groups must be considered collectively in terms of assessing SME status. Group companies cannot apply for advanced assurance if another group company has already made an R&D claim. Group relief is one of the steps in assessing a payable RDEC.
The biggest difference is the accountancy handling. An SME R&D claim generates an enhanced deduction which reduces profits, creates losses or increases losses. An SME claim is purely a tax adjustment in the accounts and not taxed. An RDEC claim is a completely different mechanism, as it is a straight percentage of the qualifying cost treated as income. This increases profits, and potentially could turn a loss into a profit or reduces losses. RDEC involves an “above the line” accounts entry and as such is taxed. Getting an R&D Tax Credit is more straightforward than a payable RDEC which involves a multiple step process of offsets and caps. RDEC does not involve enhanced expenditure.
In terms of qualification the Guidelines are the same, but some issues are treated differently for example grants and subsidised R&D require special understanding in the SME scheme but are not an issue in RDEC claims. Subcontractor rules are more restrictive for RDEC claims as R&D subcontracted to other companies is not claimable.
No. There was up until 1st April 2012 when this restriction was removed.
No. You cannot claim as an R&D expenditure an expense you have not paid. You can include accrued costs, but these must be paid at the time of the claim. HMRC stated this clearly after a tribunal verdict on this issue.
Generally, no. R&D expenditure relates to revenue expenditure.
It is possible under the intangible assets regime to capitalise revenue expenditure. This expense can be claimed if it is deducted back in the tax computation or when it is amortised. The basic principle is that to include an expense it must be part of the calculation of the P&L for the year in which it is being claimed. This is quite a technical area and we can help companies navigate it.
For capital expenditure which is capital in nature, such as plant and equipment, these cannot be included in an R&D claim but if they are part of an R&D project or projects can be claimed as R&D capital allowances in the year, they are incurred at a write down of 100%.
R&D begins when you start trying to resolve scientific or technological uncertainties and ends when they are resolved. Therefore, the qualifying activities relate to directly resolving the uncertainties. A project may have multiple strands running for different lengths of time. The strands where you can claim the costs relate to the R&D activity of resolving uncertainties, not routine work on other project strands. You can claim staff costs that relate to indirect supporting activities but not EPW or subcontractor costs.
The best answer as with any number that goes in your tax return as detailed as possible. It makes preparing R&D claims a lot easier, especially if staff leave, and makes claims defendable if HMRC come calling.
Getting companies to do this can be problematic if an R&D claim is regarded as a distraction from day to day operations; but given that an average SME R&D claim is worth about £60k tax free, it is worth asking how many days of day-to-day activity do I need to clear £60k, if it is a lot it is surely worth spending some time making R&D claims as strong as possible. We have many simple non consuming approaches which can help you keep sufficient records.
In the absence of ongoing records, producing strong end of year records including costs and narratives, and being kept up to date with changes in the schemes and interpretation is invaluable.
We can help with both ongoing records, good end of year claim documents, and if it comes to it through an enquiry. Contact us today.
Yes. Anyone who says they don’t involve some work is lying or lucky (not to have been caught out doing it wrong). But it is well worth it as on average our clients have claimed over £103k each. It is worth the effort. Our Consultants do everything they can do to make the claim process as easy as possible.