The Government continues to support innovative businesses by encouraging companies to apply for R&D tax relief and increasing rates of relief focus on.
What is R&D?
R&D is broadly defined for these purposes as activities carried out that “seek an advance in science or technology, through the resolution of scientific or technological uncertainty”.
The advance may be in the development of a product or a process and may include software developed internally.
It is a common misconception that only companies operating in certain sectors are eligible for this relief. We have worked with companies of all sectors and sizes to successfully claim the relief, including life sciences, manufacturing, marine, civil engineering, aerospace and defence and software.
What has changed?
R&D as a tax relief has been available since 2000 and HM Treasury has invested significant resource in reviewing the relief, targeting it at the right companies and ensuring the UK remains an attractive location to develop and retain intellectual property.
In this current climate, where more scrutiny is being placed on tax planning, it is important to remember that R&D tax relief is actively intended to provide benefits to companies investing in research and development in the UK.
Recent changes introduced in 2015 and in subsequent years include:
- Increases in the rate of relief for the SME scheme from 1 April 2015
- Increases in the rate of relief for the RDEC (Large Company) scheme;
- Formalisation of existing understanding of consumable costs
- Further clarification on reimbursed staff expenses
- Introduction of an advance assurance system (lasting three years) for small companies making their first R&D claims under the SME scheme
- Ongoing consultation into engagement with small companies and first time claimants.
What is the benefit?
There are two regimes for R&D relief, the SME scheme and the Large Company scheme.
Under the SME scheme, the benefit is delivered as an enhanced deduction that reduces taxable profits/increases trading losses, or alternatively a cash tax ‘credit’ can be claimed.
Companies can claim under the SME scheme provided the company or group has:
- Fewer than 500 employees and either
- Turnover of less than €100m, or
- Gross assets of less than €86m.
Qualifying expenditure incurred on or after 1 April 2015 will qualify for enhanced R&D tax relief at 230% (ie 130% beyond the original P&L deduction). The value of the tax credit is:
Date of claim
Post 1 April 2015
Value of credit per £ of R&D spend
Large company (R&D Expenditure Credit) scheme
For costs incurred after 1 January 2018 the R&D Expenditure Credit (RDEC) scheme applies The benefit is deemed to be delivered in the body of the profit and loss account as a taxable credit of 12% of qualifying expenditure. The after tax benefit (currently 9.72%) will either reduce the tax payable, or can be claimed as a payable credit by companies that do not have a corporation tax liability in the year.
How to make a claim
When preparing and submitting a claim for R&D tax relief, the key is to really look at what the company does. This will include engaging with other areas of the business, particularly technical staff, to ensure the claim is correctly scoped.
The next step is to design a methodology that avoids using significant internal resource to provide details of qualifying costs and activities.
The claim is made within a company’s tax return, but we recommend that this is supported by a self-contained report that explains the nature of the work on which a claim is being made and addresses the questions that HMRC typically asks.
Our experience of working with HMRC since the relief was introduced, and more recently through representation on the consultative committees, means that we know what HMRC expects to see from a claim and ensures that we minimise the risk of lengthy enquiries after submission of the claim.
Where BDO makes the difference
Since the relief was introduced in 2000, BDO has built close relationships with the HMRC local specialist teams and has seen a real shift in their focus from the early days when agreeing a claim was a very arduous task.
The local R&D Inspectors have been trained to actively support claims from companies undertaking R&D and our experience has been that HMRC has become increasingly knowledgeable of the relevant industries.
With the focus of the guidance becoming increasingly complex, it is crucial to involve an R&D specialist at an early stage to ensure that the relief is maximised.
From recent discussions with R&D Inspectors, we understand HMRC is toughening its stance on record keeping and looking to use the existing penalty regime where adjustments are subsequently made. This reinforces the need for a robust, supportable methodology.
How can we help?
BDO can assist you in identifying and claiming R&D tax relief. We have strong working relationships with the local HMRC specialists and through our detailed understanding of the legislation we can help you maximise the benefit of a claim. Our pragmatic, commercial approach helps capture all the relevant information required without taking up excessive management time.
For help and advice on R&D claims please get in touch with your usual BDO contact or Vincent Walker.
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