Taking a fresh look at R&D tax claims for professionals services firms
With a focus on cash flow, many professional services firms are taking a fresh look at R&D tax credits worth up to 33% of the qualifying spend.
As a result of an increase in innovation and technology development by many law firms and consultancy practices, we are seeing an increase in the number of firms taking advantage of the R&D tax credit scheme.
If you have not yet considered how R&D relief could be applied in your business, this article is an essential place to start. We have set out the key basics of the two regimes based on the size of your business and how to identify the scope of the benefit you could obtain.
Who we work with
Our team of scientists, engineers and software specialists bring forward the preparation and submission of claims in order to accelerate repayment. R&D claims are typically paid out within 30 days of submission.
Our R&D tax specialists have advised clients across the professional services industry in preparing for and submitting claims. Our clients include consultancy businesses, international law firms, large property firms and small, medium & large architectural practices.
Typical projects undertaken by professional services firms include online platforms, IT systems integration, data analytics, artificial intelligence, blockchain, structural engineering, and many more.
CASE STUDY: A law firm identified the opportunity to create and deliver wider legal services through the application of new technologies. The firm aimed to develop innovative software and business solutions through their technological development programme. The goal was to provide new capabilities to support a number of different legal service offerings through a centralised portal. This required the development of a new online platform architecture to provide infrastructure as a service (IaaS) and platform as a service (PaaS) capabilities and the development of this solution was the subject of the R&D claim.
The two regimes
Whilst many professional services firms operate through partnership structures of individuals which would not qualify, many have subsidiary companies or special purpose companies that are appropriate. This often combines with the investment requirement to fund the capital spend in companies where profits can be accumulated a lower rate of tax to individuals in a more effective way.
The potential benefits of R&D relief will depend on the size and scale of your operations and here we outline the two regimes.
1. Small and medium sized companies
For small and medium sized companies the scheme provides an enhanced deduction of 130% of the R&D costs identified. At a 19% corporation tax rate this delivers a claim benefit of between 25% and 33% of the qualifying R&D expenditure identified and a refundable cash payment is available for loss making companies.
2. Large companies
For large companies, any R&D expenditure incurred attracts a 12% credit which is accounted for above the line in the claimant’s accounts. The resulting “income” boost in the accounts is offset through a reduction of the claimant’s corporation tax bill of the same 12% credit. Where the claimant is loss making the credit can be claimed as a cash payment (subject to certain conditions) and the net benefit at a 19% corporation tax rate is ~10% of the qualifying R&D expenditure identified.
Identifying qualifying R&D expenditure
To identify qualifying R&D expenditure the claimant must demonstrate how a project meets the definition of R&D under the government issued BIS Guidelines. These guidelines require the project work undertaken to:
- Seek to achieve an advance in science and technology, and;
- Resolve scientific or technological uncertainties in achieving this advance.
R&D tax relief claims are processed in corporation tax returns. Many traditional professional services firms operating through a partnership model may still be able to obtain the relief. For example, incorporated members of a LLP or a subsidiary company within the group.
A key to assessing the opportunity is understanding your organisation’s structure, activities and where any qualifying costs reside. Here are some of the key questions:
- Are your R&D costs incurred in or transferred to the incorporated company?
- How are your commercial / legal / contractual agreements (with clients and inter-group) structured?
- Do you employ in-house or use third party software developers, engineers, designers, project managers, and other technical personnel to undertake R&D work?
- Are you updating or implementing new internal ERP/CRM systems or other back-office software development?
- Do you direct the technical strategy and engage with 3rd parties for technical expertise?
- Are you supporting your clients by undertaking R&D work on their behalf?
How can we help your firm?
Our team of 75 R&D engineering and tax specialists can guide you through the claim submission process and develop assessment methodologies around your systems and internal processes. Our specialist compliance, advisory and grant funding teams ensure a holistic approach for current claims and second opinions for historic claims.
We have a formal relationship with the Royal Institute of British Architects (RIBA) to be their partner on R&D tax claims. We also sit on HMRC’s Research and Development Consultative Committee, giving us the opportunity to contribute to the evolution of the R&D programme and adopt best practice.
Please contact Neil Williams or your usual BDO contact to discuss your R&D expenditure further.