Before we dive into this article, here is some old rope. Why old rope? Well, we think that the R&D claims management market is outdated. It’s too expensive and your clients are not getting value for money. We want to disrupt this market and we will do that in our offering.
Despite the potentially attractive levels of tax relief available, the statistics make it clear that R&D relief is hugely under subscribed by UK SMEs.
Let’s have a look at the basics so that you can send this article to any of your clients that may be able to make an R&D claim. A reduced Corporation Tax bill or a tax refund right now might be enough to keep your client company going. You keep a client too!
A business may simply not be aware that their activities qualify as innovation for R&D purposes so what are the rules of this game?
Definition of R&D
Before we get too far ahead of ourselves, we need to consider the definition of R&D / innovation:
- You can claim research and development tax credits on R&D revenue expenditure, i.e. the day-to-day operational costs directly relating to the innovation project.
- Generally speaking, you cannot include capital expenditure within the R&D tax credit claim.
The next question is what is qualifying expenditure?
Identifying what costs qualify for research and development tax credits can be complex and often leads to companies claiming for less than their full expenditure eligibility. Look for the following types of costs:
- Staffing costs
- Externally Provided Workers (EPWs)
- Consumable items
- Clinical trial volunteers in the pharmaceutical industry
- Subcontracted R&D (usually at a different rate to main SME relief rate)
Calculating the claim
Correctly calculating the amount of relief using the relevant rate across relevant accounting periods is NOT straightforward. You could offer to do this work for your client, or you could refer it ETC Tax. It’s important to get the numbers right and make life easy for your client. They will hold the source data but you (or we) can do the leg work for them.
Making the claim
To support the claim, comprehensive documentation will need to be compiled and submitted to HMRC. As a firm, we are experienced in holding business owners’ hands through the process from the feasibility stage to receiving the benefit of the claim.
How you make an R&D claim will largely be dictated by timing. It’s possible to make a claim up to two years after the end of the relevant accounting period. After this point – your client won’t be able to make a claim for R&D relief.
It is possible therefore to make an historic claim based on past qualifying expenditure by amending and resubmitting your client’s tax return. A successful claim should result in a cash payment to your client’s business. Right now, this could make a real difference.
You can also make an in-year claim or by providing the required information along with your original tax return. Relief is given in the form of a reduced tax bill, as opposed to a cash payment, assuming you are profit-making.
How much can my client claim?
Generally, your client will be able to claim:
- Qualifying SMEs can claim tax relief of 230% on eligible R&D spend;
- This means that for every £100 spend on qualifying costs, you can deduct an additional £130 when calculating profits for corporation tax;
Your relief claim will be determined by your corporation tax liability and whether you are profit or loss-making:
- If the Company is making a Profit– then one can deduct 230% of eligible R&D expenditure from taxable profits in the relevant period;
- Alternatively, if the company is Loss-making– the company can make a claim to surrender the 230% and receive a refund. The value of this refund is at 14.5% of the value of the claim.
With clients under so much cashflow stress right now, an R&D audit is a great way to help them out. Review your clients operating costs and if they qualify for R&D, encourage them to make their claim.