What are R&D Tax Claims?
Research and development tax credit claims come under two government schemes. One is for large companies (RDEC) and one is for small companies (SME R&D Tax Credits or Tax Relief). Companies doing qualifying R&D can gain a benefit by making a claim which is generally a tax saving or tax credit. The aim of the schemes is to make the UK economy more competitive by investing in science and technology. The term R&D Tax Credit is often not understood, under the SME scheme loss making companies can exchange losses for a cash benefit. This is a cash payment not a credit against current or future tax. Under RDEC the position is slightly more complicated as the RDEC can be a credit against tax, but it can also be payable as RDEC if a company does not make a profit.
How does a company qualify for R&D Tax relief or R&D Tax Credits?
To qualify a company must be engaged in a project that meets the conditions to be satisfied for an R&D claim. This is a large area to cover. But on a basic level a technical definition exists of qualifying R&D for Tax credit claims. If the company meets that definition, has expenditure that qualifies, and meets the other conditions it can claim. Experienced advice helps.
How does a company claim R&D Tax relief or R&D Tax Credits?
An R&D claim is done through the company tax return, known as the CT600, with all the deadlines that apply to filing returns. The key deadline is that claim must be made within two years of the accounting period end in which the expenditure is incurred.
How much are R&D claims worth and do they always bring in cash?
In most circumstances R&D Tax Claims bring a “cash benefit”. This can be a reduction in corporation tax otherwise due, a refund of tax already paid, or a payable R&D Tax Credit. In some relatively rare circumstances claims do not bring in cash, for example if profits have already been relieved and the R&D deduction replaces another relief, or if Tax Credits are capped under the RDEC seven steps or the recently introduced cap on R&D Tax credits. If a company owes HMRC money the amount due will be offset against the debt. SME claims bring in a benefit in a range of 18%-33% of the qualifying expenditure depending on the tax position. RDEC claims generate at the current rate about 10.5% of qualifying expenditure.
What are the negative aspects of R&D Tax claims?
Qualification and the tax aspects can seem quite hard to understand. The claim process involves making good judgments. In certain area the “rules” are particularly complicated. HMRC does not check every claim so mistakes are not always picked up on. But even after a company has been paid out on a claim the claim can be revisited and any money paid out incorrectly clawed back. This creates an element of uncertainty and risk.
What are the positive aspects of R&D Tax Claims?
They bring in additional funding and help companies plan future investment decisions. Claims support high tech and/or scientific industries and it is important the UK does well in these areas for future growth. R&D claims encourage overseas companies to do their R&D in the UK. Unlike competitive grant funding an R&D claim does not involve drawing funding from a limited pool of money, and any company that qualifies can claim. This makes funding more certain. The positive aspects of a claim outweigh the negative.
How long does it take for an R&D Tax Claim and be paid?
The work involved in preparing a claim varies depending on the size of the company, size of claim, and number of projects. It is important to be diligent in this area as ultimately the claim process generates numbers that are included in a company tax return with all the responsibilities that entails. Once a CT600 is filed HMRC aim to process 95% of SME R&D Tax Credit claims within 28 days. Once a claim is processed, it shows up in a company online tax account, it takes a further 7-10 days for HMRC security checks and BACS transfer before it arrives in a company bank account. While KPIs do not exist for tax repayments or RDEC payments these tend to be paid on roughly the same timescale as R&D Tax Credit claims. HMRC may decide to make checks on an R&D claim and this will delay any payment, although in some case by case circumstances HMRC will make a payment on account before an enquiry is completed.
R&D – Research and Development
RDEC – Research and Development Expenditure Credit.
SME – Small and Medium sized Enterprises.
Blog Written by Chris Toms – Director RandDTax