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R&D Expenditure credit - delivering R&D tax benefits above the line

05 October 2018

The R&D Expenditure Credit (RDEC) scheme replaced the legacy large company R&D scheme and offers a higher rate of relief.

What is the RDEC?

Following extensive consultation with businesses and advisors (a process BDO has been actively involved in), HM Treasury introduced the new R&D expenditure credit (RDEC) for large companies and SMEs claiming under the large company scheme with effect from 1 April 2016, fully replacing the legacy large company R&D scheme from that date.

The RDEC scheme delivers the benefit of the R&D relief in the body of the claiming company’s profit and loss account using a taxable credit of 12% (11% pre 1 January 2018 and 10% pre 1 April 2015) of qualifying expenditure. The after tax benefit will either reduce tax payable, or can be claimed as a payable credit by loss making companies.

The benefit of the RDEC scheme is that:

  • It increases your company’s EBITDA by 12% of qualifying expenditure
  • It offers a higher rate of relief than the legacy scheme (9.72% from 1 January 2018 based on a tax rate of 19%)
  • It offers a payable credit to loss making companies.

Implementation of the RDEC

As the R&D relief is delivered in the body of the company’s P&L, this means that there are some important points to consider, ahead of signing your financial statements.

Will my auditors sign off on the treatment of the credit above the EBITDA line?

  • While HM Treasury’s expectation is that the credit will be above the line, the decision over how to account for the credit will need to be made with guidance from your auditors as the accounting standards board has not issued guidance as to whether the RDEC credit should be accounted for ‘above the line’ or below.
  • The position will differ based on the facts of each individual situation, but first time claimants of R&D relief will need more initial work to satisfy the auditors of the likelihood of the RDEC being received (and the R&D claim agreed).
  • Overall, it is crucial to engage in an early dialogue with your auditors to ensure that there are no nasty surprises during your audit.

Other factors to consider when applying the credit above the EBITDA line:

  • How should you explain the changes in the presentation of the P&L to your stakeholders?
  • How should you reflect the changes in your budgeting and management accounting software?

What is R&D?

Broadly, R&D is 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 helped companies of all sectors and sizes to successfully claim the relief, including life sciences, manufacturing, marine, aerospace and defence, software – even the recruitment industry!

Steps to make a claim

1. Scope your 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.

2. Design your methodology

You need to design a methodology that avoids using significant internal resource to provide details of qualifying costs and activities.

3. Submit with a supporting report

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 in 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 HMRC’s 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.

If you would like more information in on the availability of R&D tax relief, please get in touch with Stuart Lisle or Vincent Walker.