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 has changed?
R&D as a tax relief has been available since 2000 but, during the course of this Government, the 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. The changes introduced in 2015 include:
- Increases in the rate of relief for the SME scheme
- Increases in the rate of relief for the RDEC (Large Company) scheme;
- Formalisation of existing understanding of consumable costs
- 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 2012 will qualify for enhanced R&D tax relief at 225% (ie 125% beyond the original P&L deduction). Qualifying expenditure incurred on or after 1 April 2015 will qualify for enhanced tax relief at 230%. The value of the tax credit is:
Large company scheme
For costs incurred after 1 April 2013, two schemes run in tandem – the legacy scheme and the new R&D Expenditure Credit (RDEC) scheme.
Under the legacy scheme qualifying expenditure will benefit from R&D relief at 130% with no availability of a payable credit.
Large company scheme – to RDEC or not to RDEC for pre 1 April 2016 expenditure?
The time limit to make a R&D claim is two years from the end of the accounting period. With the two reliefs running in parallel until April 2016 (when the legacy relief ceased) companies face the decision of when to ‘opt in’ to the RDEC regime.
For most companies, the decision is simple:
- The RDEC offers a higher rate of relief (7.9% vs 6.3%) based on a corporation tax rate of 21%. After 1 April 2015, this increased to 8.8% based on the future tax rate of 20%.
- The RDEC will increase the company’s EBITDA by 10% of qualifying expenditure (11% after 1 April 2015).
- The RDEC offers a payable credit to loss making companies.
There will, of course, be other factors to consider which we can assist you in navigating, but the opportunity is clear.
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 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.