R n D tax relief

[FluoridePETsolutions]

Hi all,

Can any one explain the claims for R&D tax relief. Is it's a misconception that R&D only applies to those in labs wearing white coats?

Paul

 

[Brsln2]

Your company or organisation can only claim R&D (Research & Development)
Relief, if it's liable for Corporation Tax. (I'm not sure about sole traders).

There are 2 schemes to claim the R&D relief;
• The Small and Medium-sized Enterprise Scheme
• The Large Company Scheme

An SME is a company or organisation with fewer than 500 employees and either of
the following:
an annual turnover not exceeding €100 million
a balance sheet not exceeding €86 million

 

[Paul_Rosser]

Hiya,

That is correct, R&D tax relief can be claimed by a number of industries including manufacturing, software development, engineering and Computer Aided Design. It can also apply to firms who perform R&D to support their primary business. For example a retail firm who develop their own stock control software may qualify.

The HMRC basic rules can be a bit complex but I’ll try to give you some pointers.

In order for a work to qualify for R&D tax relief it has to be performed by a limited company and meet the following criteria -

1) It must be project driven
So must have defined goals, a project plan etc

2) Must be seeking an advance in science and/or technology
This basically means you must be trying to do something which either hasn't been attempted before, or which there is limited information about in the public domain. It doesn't have to be unique, so if someone else has already achieved a finished product, but haven't released details on how they achieved this, then work to try and create the same product may qualify.

3) Must be trying to overcome technological or scientific uncertainty –
This is the one most people struggle with, what it really means is that at the start of your project there is an uncertainty that one or more of your project goals may not be possible. It can’t just be your uncertainty but more of a general industry one.

4) The knowledge couldn’t be readily deduced by a competent professional
This ties into number 3 and qualifies that the uncertainty isn’t just yours.

What you need for a successful claim is a breakdown of your R&D expenditure and a technical summary which explains to the HMRC what projects you have worked on and why they meet the guidelines for R&D tax relief.

Once you have worked out what you have spent on your qualifying projects (including staff costs, software, electricity etc) then for a corporation tax paying firm it's worth about 20%.

You can claim back for the past 2 accounting periods, so if you paid corporation tax for these periods then you will get a refund from the HMRC and if your claim is worth more than the tax you paid you can either create an additional loss and then carry this forward to use against corp tax liabilities in the future or you can surrender this loss for either 14% or 12.5% cash depending on which year it was.

The technical summary is the most complicated bit and this is the bit my current firm help clients with. The trick is to not make them too complicated as the HMRC generally aren't experts in industry.

Once your accountant has amended your tax return (CT600) to show your R&D expenditure they sent that along with your tech summary and figures spreadsheet to one of 7 HMRC specialist units for processing. Then within about 30 days the HMRC either approve the claim and process your refund (or approve your loss to carry forward), or they open an enquiry which means they either think your figures are a bit high, or want to come and see the work you are claiming is R&D.

I've dealt with a few enquiry's and they aren't actually that bad, but it does help if you have used a specialist firm to help with your R&D claim as they usually attend the enquiry with you and will fully prep you on what to expect, what to say etc.

After the enquiry the claim is either then approved, or rejected.

If you are looking to do your first R&D claim then I would reccomend that you use a specialist firm as they generally work on a "no win, no fee" basis and they will write the technical summary and QA your figures for you, then after you have done a few with them you should be in a position to do them yourself moving forwards.

Hope this helps and please feel free to ask any questions.


Paul

 

[Paul_Rosser]

Your company or organisation can only claim R&D (Research & Development)
Relief, if it's liable for Corporation Tax. (I'm not sure about sole traders).

There are 2 schemes to claim the R&D relief;
• The Small and Medium-sized Enterprise Scheme
• The Large Company Scheme

An SME is a company or organisation with fewer than 500 employees and either of
the following:
an annual turnover not exceeding €100 million
a balance sheet not exceeding €86 million

You can only claim R&D tax relief if your are a limited company or PLC.

All limited companies are liable for corporation tax and if you are paying or not has no bearing on making an R&D claim.

Even loss making firms who pay no corporation tax can still make claims for R&D and either create losses to carry forward for when they are profit making, or surrender those losses for cash back now.

 

[Paul_Rosser]

Sorry should have clarified, my post was aimed at SME's, whilst large companies can also claim the benefit is enhanced for firms with under 500 staff, less than €100 million turnover or a balance sheet of less than €86 million.

There are also some rules on subcontracted R&D, where company A pays company B to do some work as part of their R&D project, but I'll cover these if anyone asks.

 

[Brsln2]

Yes that's correct, if company A pays company B to do some work as part of their R&D project and company A is a large company, even though if company B is a small company, it would have to operate the large company R&D relief scheme.

Paul_Rosser, excellent explanation by the way. Many Thanks.

 

[Paul_Rosser]

Yes that's correct, if company A pays company B to do some work as part of their R&D project and company A is a large company, even though if company B is a small company, it would have to operate the large company R&D relief scheme.

Paul_Rosser, excellent explanation by the way. Many Thanks.

Thank you.

To expand a bit, If Company A is the contractor and Company B is the subcontractor then if Company A is a Large company then they aren't able to claim subcontractor costs, so Company B can claim but only under the large company scheme.

If Company A is an SME then they can claim 65% of Company B's costs (The HMRC use 35% as an average mark up) as part of their R&D project and Company B can't claim.

However it depends on the type of subcontractor agreement in place, the HMRC have two definitions - Subcontractor and EPW (Externally Provided Worker).

In short a subcontractor works to a deliverable, so their invoices way say something like "Specialist testing work". Where as an EPW would invoice for "3 staff for 30 hours at £20ph".

Whilst a large co can't claim subcontractor costs they can claim EPW costs, so it's all down to the relationships in place.

 

[Paul_Rosser]

I have created a flyer which is designed to answer the most frequently asked questions I get from clients, a copy of it can be found here www.randdconsulting.co.uk/flyer.pdf


Not sure if it's allowed as could be classed as advertising, so sorry Mods if it is and can you please delete.

Thanks

Paul