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Is your business making the most of R&D tax relief?

05 October 2018

The Government continues to support innovative businesses by encouraging companies to apply for R&D tax relief and increasing rates of relief.

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 is the benefit?

There are two regimes for R&D relief, the SME scheme and the R&D Expenditure Credit (RDEC) scheme.

SME 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 tax relief at 230% (ie 130% beyond the original P&L deduction). Qualifying expenditure incurred before that date qualified for enhanced relief at 225%. The value of the tax credit is:

R&D Expenditure Credit scheme

For costs incurred after 1 April 2016, the R&D Expenditure Credit (RDEC) scheme applies. The RDEC benefit is deemed to be delivered in the body of the profit and loss account as a taxable credit of 12% of qualifying expenditure (11% pre 1 January 2018 and 10% pre 1 April 2015). 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.

Read more on the RDEC.

How to make a claim

When preparing and submitting a claim for R&D tax relief, the key is to look in detail at what the company does. This will include engaging with other areas of the business, particularly technical staff, to ensure the claim is scoped correctly. 

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 ask. 

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 are expecting to see from a claim and ensures that we minimise the risk of lengthy enquiries after submission of the claim.

Where BDO make 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 have 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.

If you would like more information in relation to the availability of R&D tax relief, please contact your usual BDO contact or Stuart Lisle