HM Revenue & Customs

How to claim enhanced Research and Development (R&D) Tax Relief?

The UK Research and Development (R&D) Tax Relief Scheme is delivered via HMRC’s corporation tax filing system.

After each financial accounting period, a company is required to prepare statutory accounts along with a corporation tax computation.

The corporation tax computation calculates the tax liability of the company for the period (if profitable) based on the statutory accounts. If pre-revenue and / or in development mode then the corporation tax computation will calculate the company’s losses for the period.

The R&D tax claim figure is entered into the corporation tax computation and CT600 corporation tax return to claim the notional enhanced R&D tax deduction.

The corporation tax return and supporting computation is filed online with HMRC. It is recommended that the company also prepares a report outlining the nature of the R&D work and why / how it satisfies the HMRC definition of qualifying R&D plus detailed supporting claim calculations – or you could get an R&D tax specialist to help :)

If profitable, this will result in a reduction in the corporation tax payable.

If loss-making, the company can elect to surrender the enhanced tax loss for a tax credit payment from HMRC. Or it could elect to carry the enhanced tax loss back twelve months (if profitable) or carry forward to utilise in future periods.

HMRC aims for a 28 day turnaround time in reviewing and processing R&D tax claims.

If you would like to learn more, why not subscribe for our R&D Tax Relief Training Course:

5 Tips on Applying for SEIS / EIS HMRC Advance Assurance

Having prepared and filed too many to mention (!), here are a 5 tips on applying for SEIS / EIS HMRC advance assurance:

1. Don’t leave it too late! HM Revenue & Customs (HMRC) are generally pretty good in turning around applications within 30 days but it can peak to 6 weeks around key tax deadlines e.g. 31 Jan self assessment tax return filing date and 5 April end of personal tax year.

2. Use the form that HMRC provide for you but you may wish to accompany the form with a covering letter, as there’s not much room to disclose any additional matters that might be relevant. Don’t forget, this is a tax clearance document and therefore, HMRC will reserve the right to withdraw an approval if it later transpires that you didn’t disclose all of the facts. You have been warned!

3. The advance assurance application process is not mandatory but is well advised for two principal reasons: i) most investors will insist on evidence of HMRC approval for their own peace of mind before parting with their investment cheque [update: it is now a requirement that you include the names and addresses of prospective investors in your application]. ii) it gets you onto HMRC’s radar for the second stage which is to complete and file forms SEIS1 / EIS1 which is necessary for the investors to be able to claim the tax relief. If you haven’t applied for advance assurance, HMRC generally ask all of the sorts of questions that would have been covered in the advance assurance application in any case.

4. If you foresee that you will be seeking to raise both EIS cash after a SEIS round then apply for both within a single advance assurance application. [Update: the most recent version of the HMRC form now more easily allows for the two boxes to be ticked}

5. Take care if you are a software company and will be generating revenues from licence fee income (as most will). You will be relying on a carve-out from an otherwise non-qualifying ‘excluded activity’ – in receiving royalty or licence fee income – which states that you can qualify as a SEIS / EIS company only if the whole, or greater part, of the underlying intellectual property that generates the revenues is created by your company.

I hope you find these tips useful. If you need more, you could subscribe for this free SEIS/EIS course (below) and/or you could reach out for specialist assistance here.

What is the Seed Enterprise Investment Scheme (SEIS) Advance Assurance?

What is the seed enterprise investment scheme advance assurance video?

I am getting a lot of questions at the moment about the process for raising funding under Seed EIS and where the advance assurance fits in?

The Advance Assurance is a mechanism that allows companies to pre-qualify themselves with HM Revenue & Customs (HMRC) as a qualifying company for the purposes of raising funding under SEIS. It is not obligatory – although it is good practice. Most sophisticated investors will insist that the company has received advance assurance from HMRC of its qualifying status before investing as do many of the crowd-funding sites.

The other factor to take into account in deciding whether or not to seek advance assurance is that when you get to the stage of filing your SEIS compliance statement with HMRC (in order to secure the tax certification for the investors to allow them to claim their SEIS tax relief), if you haven’t already filed an advance assurance, the likelihood is that you will have to answer a series of questions from HMRC regarding the company’s qualifying status much like you would have completed at the time of the advance assurance – so you may as well have gone for it in any case and got yourself on HMRC’s radar as well as gaining comfort for the investors from the outset!

The process for seeking advance assurance is to use HMRC’s own SEIS advance assurance application form. If your facts are particularly complex or you would like assurance in relation to certain aspects then I tend to supplement the form with a letter to ensure that I have disclosed all of the relevant facts – so there is no come-back further down the line…

If you would like any assistance in relation to the Seed EIS advance assurance process then you can drop me a line here or at my specialist advisory firm, ip tax solutions.

 

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How to calculate your company car tax benefit for 2014/15

Although having a company car can appear to be a ‘perk’, if you delve a little deeper the tax rules are becoming increasingly onerous for those directors and employees who are ‘lucky enough’ to have them….

A ‘Benefit in Kind’ tax charge is levied on the ‘lucky’ director / employee under the company car tax benefit rules and this charge is now based on the Co2 emissions with those cars (as you might expect…) emitting the lowest C02 emissions having the lowest benefit in kind charge with a sliding scale upwards to hammer those driving the ‘dirty cars’!

HM Revenue & Customs has recently updated their online calculator to take into account the scale charges for the year ahead from 6 April 2014 to 5 April 2015.

You can find the HMRC company car tax benefit calculator for the tax year 6 April 2014 – 5 April 2015 here (or copy and paste the following link into your browser: http://www.hmrc.gov.uk/calcs/cars.htm).

So if you’re contemplating getting a new car (and you’re not sure which route to acquire it? e.g. company car or personally) then this calculator could prove helpful for you in making that decision.

 

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How to apply for advance assurance for SEIS / EIS

HOT OFF THE PRESS: We’ve just launched a brand new online course that shows you exactly how to complete and file your SEIS / EIS advance assurance application with HMRC. We walk you through every stage of filling out the form plus share some additional resources to help ensure a smoother passage through HMRC. Access it by clicking here. [Use the code: SEISAA2017 to get 50% off in January]

A short overview of how to apply for advance assurance from HM Revenue & Customs that your company is a qualifying company for the purposes of raising funding under the Seed Enterprise (SEIS) or Enterprise Investment Scheme (EIS). [Update – the form looks different now and is an online form – check out our course for the latest version (Jan 2017)]

You can find the SEIS / EIS advance assurance application form here.

The process normally takes 30 days for HM Revenue & Customs to issue advance assurance or revert back with any questions.

You can seek specialist professional SEIS / EIS assistance here.

R&D tax credits: Need to know tax tips for entrepreneurs (webinar)

In this free webinar, Steve Livingston (Founder & MD of ip tax solutions) walks Founders and Entrepreneurs through the basics of the UK R&D tax credit incentive.

This is a ‘back to basics’ seminar for company founders / entrepreneurs who would like to learn more about the Research & Development tax incentive and whether it might apply to their business.

We cover:

  1. What it is and why it was introduced
  2. An overview of the (generous) tax benefits
  3. What companies qualify and qualifying costs
  4. The process for making a claim to HM Revenue & Customs
  5. Why you should consider this incentive for any business
  6. Q&A

This free webinar lasts 55mins

Steve Livingston is a chartered accountant and experienced tax advisor to entrepreneurs. He is also the founder of ip tax solutions, specialists in advising fast growth companies.

If you enjoyed this post, get email updates (it’s free).


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EIS / SEIS: Navigating traps for the unwary (webinar)

  • Are you an entrepreneur or company founder seeking funding? 
  • Have you considered the benefits of the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) to attract private investment from individuals and business angels? 
  • Or are you a prospective EIS / SEIS investor?

If you answered YES to any of the above, this FREE webinar may be for you. 

In this 45min webinar, Steve Livingston, Chartered Accountant and experienced tax advisor to fast growth companies walks participants through:

  1. An overview of the EIS / SEIS schemes
  2. Does my company qualify – common areas for concern?
  3. How to get advance assurance from HMRC and why its important?
  4. Common investor stumbling blocks
  5. Practical issues in structuring the investment to ensure it qualifies
  6. I’ve received the funding – now what?
  7. DIY – How wrong could this get,,,,,?

This seminar aims to provide entrepreneurs and company founders with an overview of the common stumbling blocks encountered in raising EIS / SEIS fundings so that they can maximise funding opportunities and help ensure that their investors’ tax position remains protected.

You will ideally already have an understanding of the basics of EIS / SEIS, although not essential.

To find out more about ip tax solutions visit our site: www.iptaxsolutions.co.uk

If you enjoyed this post, get email updates (it’s free).


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North West SMEs claim an average £32,000 R&D tax relief

Salford Quays & BBC MediaCity UK - The Tram

Latest HM Revenue & Customs figures reveal that a total of £52m tax relief was claimed in the North West under the UK R&D tax credit scheme in 2010-11.

The £52m is spread over 985 claims giving an average claim of £53,000 (interestingly, this compares with an average claim of just £19,000 in London!), although this includes large company claims which can be significant. However, even when claims by large companies are split out North West SME companies claimed an average of £32,000 in tax relief.

This is good news for local North West companies and the number of claims made was 3rd highest overall after the South East (1) and London (2).

Overall, out of the almost 5 million SMEs in the UK only 8,140 R&D tax claims were made in 2010-11 and less than 1% of UK SMEs have made a claim for enhanced R&D tax relief since its introduction in 2000. I find this statistic staggering.

What should you do now?

  1. If you haven’t already reviewed your company activities to determine whether you have a potential R&D tax credit claim you should do this asap – there is a timelimit for backdating claims.
  2. If you have made R&D claims, compare your claims with the averages noted above and if your claim was for less than £32,000 consider whether it is worth getting a second opinion – you can amend claims if they are still within the two year timelimit.

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Mix SEIS + R&D Tax Credits to Maximise your Start-up Funding

Taxes

Taxes (Photo credit: Tax Credits)

If you are looking at starting a new hi-tech venture then the timing has never been better in utilising the latest available UK tax incentives.

Consider a scenario where say 4 enterprising entrepreneurs are looking at building a new state of the art technology platform.

They budget it will cost c£1m to get to market but know they can prove the concept with c£100k-£150k.

But there’s a problem – cashflow is tight….

This is where a bit of forward tax planning can help.

Firstly, they could set up a new company to undertake the venture. They could then structure the shareholdings such that no shareholder and director has more than 30% of the shares and subscribe for shares under the Seed EIS Scheme (SEIS). The company would need to obtain certification that it is SEIS qualifying and it would be well advised to seek advance assurance from HMRC.

A company can raise £150,000 in total under SEIS so each of the four shareholders could subscribe £37,500 for 25% of the ordinary shares.

Under SEIS, each shareholder would be able to reclaim 50% income tax relief on their investment – so £18,750 income tax relief could be claimed by each shareholder amounting to a total £75,000 tax saving.

But there’s more….

The company could use the funds to engage in a qualifying SEIS trade of preparation for a trade by carrying out R&D activities. The R&D work could fall within the R&D tax credit regime which allows for a 125% uplift in qualifying spend for SMEs and capacity to claim a tax refund in situations where the company is loss-making – this will almost certainly be the case based on our facts as the company is pre-revenue.

So say the company invests the £150,000 into qualifying R&D in its first year then the company would be eligible to deduct a further £187,500 for tax purposes i.e. 125% * £150,000.

The company would suffer a tax loss of £337,500 and could either carry this loss forward to offset against future taxable profits or it could elect to surrender the tax loss in return for a tax refund. The refund is restricted to 11% of the enhanced R&D tax spend which equates to £37,125 cash back from HMRC.

Once the SEIS cash has been exhausted they can seek further funding under the less favourable (but still hugely attractive) Enterprise Investment Scheme (EIS). Further R&D tax credits should be available in later years too whilst the R&D activities continue.

So our new venture has succeeded in deploying £150,000 of funding and expenditure at a net cost to the founders of just £37,875. SEIS and R&D tax incentives have effectively provided the additional £112,125 cash funding!

This scenario does not take into account the possibility of some or all of the SEIS shareholders taking advantage of the one-off capital gains exemption on gains reinvested in the tax year to 5 April 2013 – we’ll leave this for another post as the tax savings are staggering!

Hopefully this illustrates that with just a bit of forward planning and by seeking some professional advice, it is amazing how you can conjure up much needed additional cash to fund worthwhile ventures.

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HMRC R&D Tax Credits: How hard is it to file a claim?

HMRC R&D Tax Credits - How to file a claim

(Updated: July 2019) So you’ve had a good look at the activities of your company and think you might have a qualifying claim for Research and Development (R&D) Tax Credits – but what next?

HMRC R&D tax credits can be successfully claimed by UK companies across all industry sectors – from builders to engineers to manufacturers to technology firms to, of course, R&D companies.

There are 4 key steps to making a successful claim for UK R&D tax credits:

1. Prepare a short report that outlines the nature of the qualifying R&D activities for UK tax purposes

Firstly, breakdown the project(s) work carried out in your company over the past two years into potential qualifying and non-qualifying projects.

Consider which projects you feel pushed the boundaries of knowledge or capability in your field (not just for you as a company).

For example, you may have found yourself at point A in a new project and wanted to get to point B in terms of say, a new or improved product or service but had no idea how to get there? You therefore incurred time and costs engaging competent professionals in your sector seeking to find potential solutions.

You may have hit roadblocks along the way and therefore incurred commercial and financial risk.

Don’t forget that aborted projects can also be included in a claim.

If so, these can all be pointers towards potentially qualifying R&D activities for tax…

You should aim to build your supporting R&D report around four key headings:

  1. What is the science or technological advance sought?
  2. What were the scientific or technological uncertainties involved in the project i.e. why was it that standard or commonly accepted approaches or methodologies wouldn’t work in your case?
  3. How and when were the uncertainties actually overcome? Take us on your development journey. What worked and what didn’t?
  4. Why was the knowledge being sought not readily deducible by a competent professional in your field? It helps here if you can provide a little info on the background and experience of the team that you had involved in this project.

There are specific HMRC guidelines for claims made by companies in the field of software development including some example case-studies of qualifying projects for R&D tax purposes.

HMRC deals with R&D tax credit claims via its specialist R&D Units.

2. Quantify your R&D tax qualifying costs

Qualifying costs for R&D tax purposes fall within 3 main categories:

(i) Emoluments paid to staff engaged in the qualifying R&D (this covers salary, employer’s NIC and employer’s pension costs).

Make a table (say in excel) listing all of the staff engaged in the R&D project(s) and their total emoluments for the year. Then apply a percentage based on the number of days that they were directly engaged in the R&D project work (v their total working days).

Ideally your team maintain time-sheets but if not, an estimate based on diaries etc will suffice. Total these costs up and this will likely form the bulk of your claim.

(ii) Subcontractors / Externally provided workers – These are third parties that you subcontracted elements of the R&D work to or workers provided by a staff provider e.g. agency, in the latter case.

These relationships can sometimes be quite tricky to classify for R&D tax credits purposes and the paperwork will often be key.

(iii) Software / Consumables can also be included in a claim.

These will typically be off-the-shelf software that you had to buy to use within the R&D process (e.g. software licences).

Or bits of consumable kit or parts if you are developing physical products or prototypes. Really anything that is used up as part of the process or discarded.

Any capital expenditure e.g. on PCs bought for the process, are not likely to be consumables for these purposes; rather these would attract 100% tax write off under the R&D scheme (if not already securing 100% writing down allowances under the normal Annual Investment Allowance available to all companies).

A percentage of your power and water costs can also be claimed.

The total of the above costs will form the basis for your claim.

3. Apply the R&D tax uplift or enhancement to the total of the costs to calculate your R&D claim.

The enhancements set out below apply for UK SMEs which will cover the majority of readers of this site as the SME thresholds for R&D are huge (less than 500 employees and either turnover of less than €100m or a balance sheet total of less than €86m).

From 1 April 2015, the enhancement is 230% on qualifying costs.

So say your total qualifying costs (from points 1-3 above) in your financial accounting period ended 31 March 2019 are £150,000, then under this R&D tax incentive you will receive an additional £195,000 deduction against your taxable profits for the year. This is for company corporation tax purposes only i.e. it is a ‘notional’ tax deduction only that does not reduce your profits for accounts purposes.

This means that you have less profits subject to corporation tax so it reduces your bill.

Taking this a step further, say your adjusted taxable profits (but pre-R&D enhanced deduction) are £125,000, then this additional R&D adjustment will turn an otherwise likely corporation tax bill of £23,750 into a tax loss of £70,000. Not only does this eliminate the c£24k tax bill, but it potentially results in a tax credit rebate of £10,150 from HMRC (at 14.5%)!

Now you can hopefully see the value of investing some time to pull together an R&D tax credit claim!

You can go back to accounting periods ended in the past two years to make or amend claims – so its not too late to revisit and amend previously filed corporation tax returns.

4. How to file the R&D tax credits claim with HMRC

The R&D tax credit claim is included in your corporation tax return for the relevant accounting period. Corporation tax returns are filed online. Your R&D report and accompanying calculations can be filed online via the HMRC filing portal. They will be passed internally to the relevant HMRC R&D Unit for processing.

HMRC aims to process all R&D tax credit claims within 28 days of filing.

Getting the best R&D tax result for you

There is more work to be done before your R&D tax claim is filed with HMRC. This work is to determine the optimum treatment of the claim for your specific circumstances.

For example, rather than reclaim the cash tax credit at 14.5%, it may work out better for you to carry a resulting loss back to the previous profitable accounting period. Or carry forward to future periods if you expect to return to profitability quickly.

This is because the net cash recovery might be higher than simply claiming the in year tax credit.

You can attempt to make a claim yourself or you could try using HMRC’s new R&D pilot programme although you may find you achieve a better result by seeking some professional help from R&D tax credits specialists.

Either way, I hope that the above is helpful and we see more R&D claims being filed by UK companies!

 

You can find a more detailed R&D Tax Credit Guide at our sister site: IP Tax Solutions.