R&D Tax Credits are government incentives to reward companies undertaking Scientific or Technological activities (including software development and manufacturing) in the UK. Approximately £350M of R&D Tax Relief was claimed by northern companies during the 2016 fiscal year and with HMRC statistics revealing a 19% increase of in the number of claimants (relative to the 2015 fiscal year) we anticipate that the level of benefit provided will continue to grow as more companies learn about the regime and understand how to maximise their claim.
Dale Southall, from Leeds-based online R&D Tax software provider RD Relief, explained that although a significant proportion of companies across the North of England have become aware of R&D Tax Credits, many are underclaiming owing to a lack of comprehensive understanding about some of the more subtle details of the R&D guidelines. Most commonly this will concern the job roles included within a claim – often more individuals are contributing to the R&D than first meets the eye.
Another common mistake is where companies are under the false assumption that SMEs (Small and Medium Enterprises) cannot claim where projects have been subsidised by other companies, or through grants.
Although it is often the case that companies cannot claim R&D relief for funded projects under the SME regime, most of the time they will be able to claim under the RDEC (Research and Expenditure Credit) or RDA (Research and Development Allowances) regimes.
Both the RDEC and RDA regimes are less beneficial than the SME regime but still provide significant benefits. For expenditure from Jan 2018 RDEC delivers an above the line credit of 12%, whereas RDA (for costs that are capital in nature for tax, rather than accounting, proposes) allow companies to claim 100% of the capital cost in the year incurred.
From the other side of the equation, there have been local SME eligible companies claiming RDEC where they were ‘selling the outcome of R&D’ rather than ‘being paid to undertake R&D’. In these cases, the companies would still be eligible to claim under the more SME regime, that provides a 230% deduction from their annual profits – significantly reducing their tax liability (or if loss-making, providing an above the line cash credit).
A further common misunderstanding that we find leads to R&D claims not being maximised is where companies always claim capitalised expenditure under the ‘Research and Development Allowances’ regime. The correct categorisation depends on whether the costs are capital or revenue for ‘tax purposes’ rather than accounting purposes. This definition means that companies can claim costs capitalised as Intangibles under the revenue regime (referred to as an S1308 election). In some cases it may also be possible to claim SME or RDEC Relief on the depreciation of Tangible Fixed asset costs, should they also be revenue for tax purposes.
These are just a few of the potential mistakes that we frequently see that have led to non-optimised claims, but it equally essential (if not even more so) not to overclaim. None robust processes will lead to HMRC enquiries and possible penalties.
Dale explains that the RD Relief online R&D claim platform guides companies through the minefield of R&D Tax complexity for a fraction of the costs of manual services. However, whether or not companies are looking for an online solution, they should first and foremost be mindful of maximising the generous R&D benefits available, but in a robust way that will stand up to HMRC scrutiny.