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R&D Tax Credits Top Ten Tips

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

R&D Tax Credits Top Ten Tips

Introduction

R&D is an exceptionally valuable relief that, even after a decade or so since it was introduced, many companies still overlook.

HMRC has done a sterling job at keeping the R&D claims flowing providing vital cash flow for start up businesses during the COVID 19 crisis.

Here are our top ten tips when trying to find out more about R&D for your business:

Talk to the right people?

R&D tax relief requires on to identify:

  1. is qualifying R&D activity taking place?: and
  2. how much qualifying expenditure is being incurred?

In some smaller businesses, it might be the same person who will be able to help you decide on both questions.

However, for larger businesses, then you might need to speak to different people in the team:

  1. in respect of question 1, the best people to speak to will be the technical team; and
  2. in respect of question 2, this will be the domain of the finance team. 

What is the project?

It may sometimes be difficult to identify precisely what the project is. However, we must identify the advance in science and technology and identify the uncertainties in the project.

When was the start date of the project? Have the uncertainties been overcome? If they have, and the project is therefore finished, then any further expenditure will not qualify.

Identify any subsidies or grants which have been provided.

Keep records.

Salary costs

Record all appropriate salary costs. This also includes NICs, pension costs and travel costs.

Do not include Benefits in Kind.

Consumables

These are items which are used in the R&D project and are no longer usable in their original form. These include, by statute, water, fuel and power. However, it might also include laboratory chemicals.

One area is where these items are only partly used in relevant R&D. In such cases an apportionment must be made. There is no statutory method but a reasonable basis will usually be accepted. Broad brush approaches, such as dividing this up on floor area or staff numbers involved, are again usually accepted.

However, if the R&D uses disproportionately high levels of power, for instance, one might look at this more forensically.

Support staff costs

Ensure that staffing costs for those providing support are properly included in the claim. However, their work must be in relation to qualifying R&D activities. This may require a splitting of the time spent on qualifying and non-qualifying support to ascertain the amount that may be claimed.

R&D subcontracted to SMEs

Where an SME incurs expenditure on R&D contracted out to it then it will not be able to claim under the main R&D scheme for SMEs.

However, all is not lost, as it may claim an additional deduction for up to 30% of its expenditure if it meets various conditions.

Grants, subsidies and state aid

When considering whether to apply for grants etc. a business should consider the impact on the availability of R&D relief.

R&D tax reliefs under the SME scheme are not available for expenditure that is subsidised. If the only reason that the expenditure does not qualify for SME scheme R&D tax relief is that the expenditure is subsidised, then an SME can make a claim for relief under the large company scheme.

Where a project has received any funding which is a notified State Aid then no expenditure on that project can qualify for the R&D tax relief under the SME scheme.

If a grant or subsidy is received other than by way of notified State Aid, the expenditure is subsidised to the extent that it does not exceed the subsidy. This may result in the expenditure qualifying for R&D tax relief partly under the SME scheme and partly under the large company scheme.

What about software?

The creation of software can be qualifying R&D in two ways:

  • Where it is developed as a tool for use in a larger R&D project; 
  • Where the software is the project itself.

HMRC helpfully provides a list of the type of software projects that do (and do not!) qualify for relief.

The application of the rules to the Computer Gaming industry can be found in the following document.

Don’t forget R&D Allowances (RDAs)

The RDA allowance offers a stripped down version of the Capital Allowance for capital expenditure in relation to qualifying R&D.

For example, the construction of a new laboratory to conduct R&D activity might qualify for RDAs.  The relief is usually given at 100% and treated as a trading expense.

Don’t look at R&D in a vacuum!

R&D relief is an important and attractive relief provided by Government and it makes absolute sense for a company to explore its availability.

However, this should also be considered as part of the overall finance and tax strategy of the business, rather than as an adjunct.

 

If you have any queries regarding our R&D Tax Credits Top Ten Tips, or any R&D tax matters, then please do not hesitate to get in touch.

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