7 R&D Tax Credit Tips
- Don’t assume your company doesn’t qualify – even if your accountant has discounted it or perhaps not even mentioned it (in fact that might be all the more reason to check it out!)
- It doesn’t matter whether your company is profitable / tax paying in a financial period or loss-making – R&D tax relief can benefit you and release cash into your business in both cases
- Think about R&D tax relief and how it might apply to your company as early as possible. This way you can ensure that you are capturing relevant supporting information, documents and costs as you go along – rather than trying to cast your mind back and rebuild retrospectively which might lead to sub-optimal claims
- Don’t discount R&D tax relief if you carried out eligible activities a couple of years back thinking you’ve missed out – you can make a retrospective claim for accounting periods ending in the past two years. So at the time of writing this post (20 June 2016), say you have a 30 June financial year end then the periods ended 30 June 2014 and 30 June 2015 are still open and eligible for R&D tax credit claims.
- Don’t wrestle with the definition of what activities qualify for R&D tax relief on your own – many companies wrongly count themselves out when a quick chat with a R&D tax specialist might have helped them understand how they do qualify. Many company owners are stunned at the breadth of the R&D tax relief.
- Don’t think you have to leave your current accountant to access specialist R&D tax advice – most R&D specialists will supplement the good work your accountant is already doing for you with their specialist R&D tax services so this needn’t upset your ongoing accountancy support relationship.
- Think about how the UK R&D tax incentive can fit into your overall funding profile – so tax advantaged funding such as SEIS / EIS can typically be used in harmony with the R&D tax incentive. Watch out for grants as these can impact adversely on the levels of tax relief available under the R&D tax incentive. Cash tax breaks such as the Patent Box can be used alongside the R&D tax relief. As you can see, thinking about how this can all fit together sooner rather than later will help optimise available funding.
Tax Matters: R&D tax credits; Patent Box plus SEIS / EIS course
Here’s a round up of some recent financial & tax news that might be of interest – you can find an audio download version of this post below:
Calls for quarterly R&D tax relief for SMEs
In an effort to boost SME cashflow, there are calls for the Government to make the UK R&D tax incentive a quarterly rather than end of year tax relief. Currently SME companies claim R&D tax relief retrospectively. Large companies can, however, reduce (in year) quarterly instalment tax payments that they are required to make thereby securing the benefit of the relief earlier. This measure would help level the playing field. This makes sense – we’ll have to wait and see…
March Budget 2016 – Pension countdown
George ‘O’ will step up on 16 March 2016 to deliver his Budget Statement and the big news is expected to be regarding restrictions on income tax relief on pensions for higher rate tax-payers.
Action point: Consider making pension contributions in advance of the Budget date.
Patent Box changes afoot – act now
New, more stringent rules will apply to companies that elect into the Patent Box tax incentive after 30 June 2016. This follows the ‘beating’ this UK Gov tax incentive received from other EU states following its introduction in 2013 (but for how much longer in the light of a possible Brexit….?).
Action point: If you have a patent or patent pending, consider electing in before 30 June 2016.
Get ready for new dividend tax rates
From 6 April 2016, new dividend tax rates will apply that results in an almost complete shake-up of the fairly established remuneration structures for most owner-managed companies.
Action points: Run some calculations to see how you might be affected and consider paying further dividends in advance of the 5 April 2016 deadline. Note that companies that qualify for R&D tax relief might have some of the down-side offset by receiving a greater proportion of the remuneration in the form of PAYE salary / bonus and claiming enhanced R&D tax relief (dividends are not eligible).
Buy-to-let changes – traps for the unwary
I probably don’t need to tell you more about the widely publicised restrictions being placed on buy-to-let interest relief etc but watch out for the Stamp Duty Land Tax (SDLT) 3% surcharge that can bite in what might otherwise be fairly innocuous circumstances…
For example, buy a new residential house before selling old residential house = 3% ouch! You might be able to receive a refund in these circumstances but the initial additional SDLT outlay can be significant and is yet another case of a tax sledge-hammer to crack a nut!
SEIS / EIS Course Launch
By popular demand, we have set up a new course setting out in the ins-and-outs of the hugely popular (yet often misunderstood!) Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
These UK Government tax incentives are growing in popularity – especially with the growth of crowd-funding platforms such as Crowdcube. We have helped and continue to help 100’s of companies navigate and make the most of these tax reliefs which can be quite tricky to navigate for the uninitiated.
If you are a company founder or considering diversifying into business angel investing yourself, you should benefit from this course.
You can sign up to receive the course via email here:
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What’s so good about R&D tax relief?
The R&D tax relief is aimed at entities that are registered for UK corporation tax, so primarily UK companies.
The relief itself is administered through the company corporation tax filing regime.
What are some of the key benefits?
- Cash paid to companies that are pre-revenue and / or loss-making to reward them for undertaking R&D work – even if no tax has been paid by the company as yet!
- Reduction in corporation tax payable or refund in cash for those companies that are profitable
- Average claims for SMEs of c£50,000+
- Can be claimed year on year
- Administered by dedicated specialist HMRC R&D Units across the country
- Typical HMRC review process of 28 days from submission
- HMRC Advance Assurance process for first time claimants
- Can go back two years retrospectively to claim for earlier projects
- No matched funding
- No equity to give away
Despite these benefits, it is surprising how many companies continue to overlook this government tax incentive and potentially miss out.
With this in mind, we have recently set up a new course on the UK R&D tax relief that might prove to be a useful primer for founders or entrepreneurs who would like to learn more about this attractive UK tax incentive and how you might benefit.
You can subscribe below:
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:
Fancy an extra 5% on your R&D tax relief?
The UK R&D tax credit incentive scheme continues to get better and better (have I said this before!?!)
From 1 April 2015, SMEs attract an uplift on their qualifying R&D expenditure of 230% (up from 225%). This means that in cash terms the tax credit is now worth 33.35%!
So 1/3rd of your expenditure on staff carrying out R&D project work could effectively be subsidised by this generous UK tax incentive – that’s up from c25% just over a year ago.
If you’ve yet to take a look at this incentive – especially if you are a developer, digital agency, creative or engineer or manufacturer – I urge you to do so. You can always get some help from some friendly folk who are R&D tax specialists :)
Taxation of Innovation – How UK tax incentives support the innovation lifecycle
Here are the slides that I used to present to the Chartered Institute of Patent Attorneys (CIPA) at a seminar in Liverpool last week. The key relevant theme was the Patent Box (given the audience) but my objective was to emphasise how and where the Patent Box fits into the wider series of Government tax incentives aimed at innovative IP-rich UK companies.
From start-up we have the Seed EIS followed by EIS for tax efficient funding. Both schemes are designed to support companies undertaking R&D work and creating their own IP.
R&D tax credits then step into support companies during the development phase. The R&D tax credit relief continues to be a fantastic source of support for UK companies but up until 1 April 2013 there was a cliff-edge at the exploitation stage as there were no tax incentives there to support IP rich companies.
This where the Patent Box steps in to support companies with qualifying patents to complete the innovation business lifecycle.
Two common R&D tax credit stumbling blocks for start-ups
Picture the scenario: a new technology startup. The founders invested £250,000 into the development of some new technology. The company is burning through the cash at a rate of knots and so they’re looking forward to recouping a chunk of it by claiming R&D tax credits under the ‘R&D tax credit scheme’ – something they’d heard about somewhere not long ago… In their minds, the tax credit had already been ear-marked for the next phase of work.
But two HUGE (yet surprisingly common) issues were about to put a hole through the R&D tax claim:
- Most of the costs were subcontracted to third party developers. This is fine in principle but under the R&D tax incentive rules such costs are restricted to 65% of the costs incurred (where the subcontractor is unconnected). The logic here is to eliminate the ‘profit’ element made by the subcontractor on the R&D work to get closer to an employee scenario. So here, in one swoop, almost half of the qualifying R&D costs and therefore claim had gone…!
- The company’s accounting period ended on 31 March 2012 and, for periods ending before or on this date, any R&D tax credit is capped by the PAYE / NIC suffered by the company in the period. This company had no employees (they’d subcontracted out all of the work) and had paid themselves no salary so there was £nil PAYE liability and therefore £nil repayable R&D tax credit. If the accounting period had ended just one day later, the company would have fallen within revised rules whereby the PAYE / NIC cap falls away. Ouch.
Of course, we should not lose sight of the fundamental issue of whether the company’s activities qualify for R&D tax purposes in the first place? If so, the company could still get a good result overall (a significant enhanced loss carried forward in the 31 March 2012 period end to offset against future trading profits and a potential repayable tax credit on qualifying activities and costs incurred in its next period ended 31 March 2013 and onwards) – just not perhaps as good as the founders had understood from the outset.
Fortunately, given the relaxation in the rules for accounting periods ending after 31 March 2012, the PAYE cap is no longer a problem – although it can still bite for retrospective claims (which can be made until 31 March 2014).
This is often a problem with tax incentives – there are almost always traps for the unwary…
Image: BASF – The Chemical Company via Compfight
R&D Tax Credits – Don’t miss your claim!
Statistics from HM Revenue & Customs suggest that less than 0.25% of UK companies are taking advantage of this fantastic Government incentive which can apply to all companies across all sectors.
The R&D tax credit scheme has been in existence since 2000 and the tax relief available has got better and better year on year.
It is important that you investigate the potential for your company to make a claim – you could seek some professional specialist R&D advice here.
R&D tax: 5 common misconceptions
I could probably give you 25 misconceptions that I hear on a daily basis but, for now, here are 5 common misconceptions regarding the UK R&D tax relief:
- “You need to have paid corporation tax to receive an R&D tax credit cash payment from HMRC” – wrong! HMRC will help you supplement your development costs by paying you a tax credit equivalent to roughly 25% of your qualifying R&D spend (if loss-making).
- “You need to have paid sufficient PAYE / NIC to receive an R&D tax credit cash payment from HMRC” – wrong! This requirement was dropped for accounting periods ending on or after 1 April 2012.
- “I must have missed the boat as this is the first I’ve heard of R&D tax relief being relevant to a company like mine and we incurred our development expenditure in last year’s accounts” – wrong! We can apply claims retrospectively over the accounting periods that ended in the past two years.
- “My company is too large to be eligible to make claim under the preferable SME R&D tax regime” – probably wrong! The SME definition for R&D tax covers probably 90%+ of the UK companies i.e Less than 500 employees plus either turnover of less than €100m or balance sheet total of less than €86m.
- We don’t have an R&D unit with specialists in white coats – probably one of THE most common misconceptions – fear not, the R&D tax relief applies across all sectors and industries as technological advances can happen anywhere…
Please get in touch if you’d like to learn more – plus no doubt allow us to dispel the other 20 misconceptions…!
