There were various points raised in the budget relating to the topic of Research and Development and the qualifying claims relating to it, and some misconception relating to the entitlement to this relief, mainly brought about by some so called specialist R & D Claim experts, so here below some information, hopefully will be useful
Research & Development Credits ( R&D )
From 1 April 2015, SME companies that have incurred costs on qualifying R&D projects can obtain an uplift on these costs of 230%. It means that if a company spends £100, it will receive tax relief as if it had spent £230
Where a company has unrelieved trading losses it may surrender the R&D tax relief in exchange for a tax credit at 14.5%
The amount that can be surrendered is the lower of the actual tax-adjusted loss or the total qualifying expenditure (i.e. the qualifying costs plus the uplift).
It is possible to make a ‘combination claim’, where the R&D tax credit can be used to bring the tax payable to zero, and surrender the balance of the relief for a repayable tax credit.
R&D Relief is a Corporation Tax relief.
There are two schemes for claiming relief, depending on the size of the company or organisation:
· The Small or Medium-sized Enterprise (SME) Scheme
· The Repayable Credit Large Company Scheme or R&D Expenditure Credit (RDEC).
Here we focus on relief for SMEs, although noting that the large company scheme applies to SMEs in certain circumstances (see below for briefing on large companies).
R&D relief is given in two different ways, by enhanced deduction or by payable credit.
Preventing abuse of R&D relief by SME’s
New measures have been confirmed in order to prevent the abuse of R&D relief by SMEs and deter fraudulent claims where there is little or no genuine R&D activity.
From 1 April 2021 (delayed from April 2020):
· The amount of payable credit that a qualifying loss-making business can receive through R&D relief in any one year will be capped.
· There will be a £20,000 minimum claim threshold below which the cap will not apply.
· The cap will be the threshold plus three times the company’s total PAYE and NICs liability for that year.
· Relevant related party PAYE and NICs may be included in the calculation of the cap.
· Businesses will be exempt where a two-stage test is met:
o The company’s employees are creating, preparing to create or actively managing intellectual property, and
o the company’s expenditure on work subcontracted to, or EWPs provided by, a related party is less than 15% of the total R&D expenditure of the company.
In order to claim relief, a company must have been engaged in qualifying R&D activity and then satisfy a number of specific conditions.
- The company must be a going concern.
- Any single R&D project must not receive total aid of more than €7.5m.
Special rules and conditions
- There are special rules if a company has received state aid in respect of the project.
- Expenditure is not generally available if it has been subsidised.
- There are special rules for contracting and sub-contracting R&D.
Some specialist R&D claims firms have automated selling processes that are designed to convince businesses that they are undertaking R&D, and so will qualify for a tax repayment by claiming R&D tax credits.
Those R&D claims often succeed because HMRC hasn’t properly reviewed them, but this is changing. There are more cases of unsupported R&D claims being taken to the tax tribunals. For example see the case of AHK Recruitment Ltd, which is worth reading.
HMRC has also updated its Corporate Intangibles Research and Development Manual to include common errors it finds when it examines an R&D claim (see CIRD80500).
These errors cover almost every aspect of the R&D scheme but the list starts with the basic: “project activities outside the scope of R&D for tax purposes”.
A myth being circulated in the building trade is that alterations to offices or buildings to accommodate covid-secure working qualify as R&D – they don’t. !!
For a project to qualify as R&D for tax purposes it needs to involve “an attempt to achieve an advance (in knowledge or capability) in a field of science or technology, through the resolution of scientific or technological uncertainty.”
All those elements need to be present:
- an attempt to advance knowledge or capability
- in science or technology
- resolving a scientific or technological uncertainty.
Guidance on what is R&D for tax purpose is set out in a paper linked to below, which is referred to in the R&D regulations.
Even if the project does qualify as R&D there are plenty of other mistakes that can be made with an R&D claim; from including the wrong categories of expenditure, to claiming under the wrong scheme (SME or large company).
If you have undertaken genuine R&D work our R&D tax experts would be happy to review the R&D claim to ensure HMRC don’t have a reason to challenge it years down the line.
Remember we are here to help www.shaikhandcoaccountants.com or 01892 552696
Stay healthy , safe and busy, I will be back with some more emails, sorry !!