How to make the most of R&D Tax Relief?

R&D Tax Relief is available to help innovative organisations reduce their tax bill. There are many reasons why organisations do not make the most of this opportunity. Some businesses may not understand the process of making a tax relief claim or not even believe that they are eligible for the tax relief in the first place.

Here are some tips for businesses to consider so that they can make the most of the available R&D Tax Relief.

Determine the size of the business

Tax Credits and relief are dependent on the size of the company, so it vital that business owners understand their classification.

SME (small and medium) companies usually qualify for the more beneficial enhanced relief scheme. Large companies, on the other hand, will only be eligible for RDEC (Research and Development Expenditure Credit Scheme). Before a claim is made, determine the size of the company. HMRC uses the following rules to identify a large company

• Has over 500 employees and either
• An annual turnover of more than 100 million euros OR
• A balance sheet total of over 86 million euros.

If the company doesn’t fit these criteria it is considered as an SME. However, to claim SME relief, the figures of any connected and partner companies also need to be considered.

Is the business already receiving a grant?

If a company is currently receiving funding from a grant, it could have an impact on a tax relief claim. Expenditure covered by a grant cannot also qualify for relief under the SME scheme, but if the grant only covers some of the expenditure, enhanced relief can usually be claimed on the balance. However, if the grant for a specific project is notified state aid, no relief can be claimed for that project under the SME scheme. It may be possible instead to claim for tax credits under the RDEC scheme. 

This system is relatively complicated; however, it means that businesses can benefit from tax relief and grant funding simultaneously if approached in the correct way. This provides vital money to further invest in the company for business development.

Understand exactly what can be claimed for 

Knowing exactly what can and cannot be claimed as R&D expenditure is a vital part of the claiming process. The categories of expenditure that qualify are quite limited and incorrectly claiming for things can severely delay a claim and may lead to a costly enquiry.

All the R&D costs eligible for tax credits are called “qualifying expenditure.” These costs include:

• Direct Staff costs (including salaries, pension contributions and employer’s NIC)
• Subcontracted R&D
• Externally provided workers such as agency staff
• Software
• Consumables such as materials, parts, heating, lighting and water costs that are directly attributable to R&D processes
• Money paid to volunteers for clinical trials

A specialist can help you identify all costs that qualify and help to keep the process as quick and as smooth as possible.

You can still claim if there is a loss

Businesses may think that because they have losses and are not taxpaying in the year, it is not worth claiming R&D relief. However, SMEs can claim enhanced relief to give the company more tax losses. These must be carried forward and offset against future profits to save tax at the corporation tax rate. Alternatively, losses generated by an R&D claim can be surrendered in exchange for a 14.5% cash credit.  It is important to remember that the additional losses created by an R&D claim do not affect the company’s balance sheet.  They are tax losses only and can give the company a valuable cash boost.

The large company scheme operates differently and gives the company a taxable credit of 13% of qualifying expenditure (12% for expenditure prior to 1/4/20). This credit can be deducted in full from any tax liability in the year, or if there are current year losses, can be surrendered net of tax for a cash repayment.  Your tax adviser can help you decide the most appropriate way to use your R&D reliefs.

 

Write a detailed technical narrative

An important part of any claim is the technical narrative. This is a vital part to get right as it explains to HMRC why the claim is valid. Always write it from a technical perspective and try to be as succinct as possible. Keep it simple but ensure all the key points you want to make are included. A lengthy application will not always increase the chances of it being successful.

A project that failed for technical reasons can still be qualifying R&D. The key is that the company was seeking to achieve an advance in technology, not that it was successful.

Claim retrospectively 

If a company has never claimed for Tax relief credits before, take note. It is possible to claim retrospectively for the last two full accounting periods. Remember this before making the initial claim to ensure you receive the correct amount the business is eligible for.

Get a professional to help with your claim 

Ensure the claim is maximised by hiring expert help. Having someone with extensive knowledge of the process can be an invaluable resource. A professional will ensure you are applying for the correct scheme, maximising your claim and can also help the process be quick and smooth without any lengthy delays or enquiries.

What’s Next?

Although the process is complex, the great news to businesses is that the range of activities that qualify for R&D is broad. The criteria also apply to almost every industry.  

If you would like to discuss R&D Tax relief further or need advice on how to make a successful claim, then the Wright Vigar team are here to help. Visit https://www.wrightvigar.co.uk/services/randd-tax-relief/ or email website@wrightvigar.co.uk