At BHP, we recently passed our financial year end and therefore April has given me time to reflect on all the R&D work we have done for our clients in the past 12 months.
It has been an exceptionally busy year for our R&D team, we have submitted over 100 R&D claims for our clients and saved them a cumulative total of over £9m in corporation tax.
We have submitted successful claims for companies in a wide variety of sectors; these include the more “standard” R&D sectors such as engineering, manufacturing and technology businesses but it is also pleasing to see that we have covered a wide range of businesses where R&D may not usually be considered. Some of the more unusual sectors where we have made claims include:
- Specialist Haulage;
- Recruitment;
- Retail;
- Potato Storage & Packing;
- Publishing; and
- Specialist Construction Services.
Whatever the sector, there is common thread of R&D related queries that we address with our clients. We support our clients from their initial innovative ideas right through to submitting a robust R&D claim on their behalf and I thought it would be useful to share some of the more common queries we help our clients with.
Common R&D Queries
Do we do R&D?
The first point of discussion is usually regarding whether any of the activities of the company qualify as “R&D”. This discussion can take many forms depending on the type of industry but the fundamental question is whether your company is “taking a risk by attempting to resolve scientific or technological uncertainties”. Activities considered to be routine would be excluded but R&D can include:
- creating now products, services or processes: or
- changing or modifying to improve existing products, services or processes.
Therefore making something stronger, lighter, cheaper, more efficient…..through solving technological or scientific uncertainties is a good indicator that R&D may be taking place. Failure of any particular project also highlights the uncertainty and risk involved.
As we have had successful claims across a range of sectors, it is always worth having a discussion with us to explore whether R&D may be available.
What are the benefits of R&D claims?
There are 2 forms of R&D tax relief, the SME scheme and the large company (RDEC) scheme. Roughly the cash benefit of identifying qualifying R&D expenditure is as follows:
SME Scheme
Profitable, tax paying company 25% in addition to the 19% tax relief already claimed on costs
Loss making 33% by converting losses into a repayable tax credit
RDEC
All companies 9-10% after accounting for tax payable on the RDEC credit
The majority of claims we make are under the SME scheme, which is more generous. The relevant thresholds for SME’s are that you must have fewer than 500 staff and either:
- A turnover of no more than €100 million; or
- Gross assets of no more than €86 million.
Care needs to be taken when looking at groups of companies or connected entities as the criteria above may need to be aggregated when considering whether you are an SME.
The benefits above also illustrate that loss making companies can benefit from making an R&D claim, even though they may have paid no corporation tax.
How far can we go back?
Usually two years from the end of your accounting period for any qualifying expenditure that you’ve identified during that period.
What expenditure can we include?
You can claim R&D on revenue expenditure but you usually cannot include capital expenditure (ie fixed assets). The main revenue expenditure headings are:
- Staffing costs
- Subcontracted R&D (usually at 65% of the cost)
- Externally Provided Workers (usually at 65% of the cost)
- Consumables
- Software
We take the time to review all sources of expenditure to maximise the amount of qualifying R&D expenditure available in the claims we prepare.
The main staff cost exclusions are benefits in kind and dividends paid. In many SME’s dividends are commonly taken by owner/directors as part of remuneration planning but do not qualify for R&D relief, so it is always worth revisiting the salary/dividend balance where a company undertakes significant R&D.
We are doing some R&D on behalf of a client – can we claim?
The main issue here is whether the company is undertaking its own R&D project or whether it is actually a subcontractor to an R&D project being undertaken by its client. Therefore who should claim R&D?
The answer to this question will depend on the nature of the relationship between you and the client and the facts of the particular situation will be key. The main indicators will be level of financial risk you take, the autonomy you have and where the intellectual property from the project will vest.
We are receiving grants – does this affect the R&D Claim?
Grant funding and R&D tax credits are both ways of funding your innovation. Grants are usually receivable in advance whereas R&D credits tend to retrospective and only receivable after expenditure has taken place. It is commonly considered that R&D tax credits cannot be claimed where grant funding has also been received.
It is correct that grants can inhibit a subsequent R&D tax credit claim because many grants are considered to be state aid, as is the SME R&D scheme. RDEC is not considered to be state aid and therefore it can be the alternative source of R&D claim if grants have already been received for a project, albeit at a lower rate. However, it may be possible to claim SME R&D despite grant funding and much of this will depend on the type of grant, what it applies to and how it is worded.
The key to maximising a R&D claim alongside grant funding would be to either obtain non-state aid grants, or to specify the grant towards a certain project, potentially leaving other R&D expenditure available for a SME R&D claim. Therefore a key to success here will be planning in advance.
