Research and Development Expenditure Credit scheme explained

RDEC (research and development expenditure credit) is a UK government tax incentive designed to reward innovative companies for investing in research and development (R&D). It is targeted at large companies, but it is also accessed by SMEs in some circumstances.

What is RDEC?
RDEC is one of two R&D tax credit incentives offered by the UK government to promote private sector investment in innovation. The tax relief is for large UK companies that are subject to UK Corporation Tax, carry out qualifying R&D and spend money on those activities. SMEs are usually eligible for the SME R&D tax credit, which differs from RDEC: it offers a more generous tax credit rate and a wider eligible cost base. However, in certain circumstances, SMEs are prevented from using the SME incentive, and therefore claim through RDEC instead.

Overview
• An RDEC tax credit is worth 13% (Previously 12%) of your qualifying R&D expenditure.
• The credit is taxable at the normal Corporation Tax (19%) rate which effectively means the benefit is worth 11p for every £1 you spend on qualifying R&D.
• The benefit can be shown ‘above the line’ (ATL) – this means it is visible as income in your accounts.
• The credit is offset against your tax liability or, in some circumstances, is payable in cash.

Benefits of RDEC
RDEC can be accounted for above the line in your income statement (also known as your profit-and-loss account), providing a positive impact on visible profitability in your accounts. This visibility in turn has a positive impact on R&D investment decisions.
Since RDEC is independent of your company’s tax position, the benefit you receive is easier to forecast. This provides far greater stability and makes it easier for large companies to factor the relief into their investment decisions.
Unlike its predecessor, the large company scheme (defunct as of 1 April 2016), RDEC also offers a cash credit for loss-making companies.

What is the RDEC rate?
The RDEC rate is 13%. However, because the RDEC rate is paid net of Corporation Tax, the RDEC effective rate you receive is worth 11p for every £1 spent.
The RDEC rate was increased in the Spring 2020 Budget from 12% to 13%. This was the third time the RDEC rate has increased since its introduction, which is great news for companies using the incentive.

RDEC qualifying activity
RDEC uses the guidelines produced by the Department for Business, Energy and Industrial Strategy to define the activities that constitute R&D. These are sometimes referred to as the ‘BIS’ or ‘BEIS guidelines’ and apply to both RDEC and SME R&D tax credits alike. The definition of R&D for tax purposes is purposefully broad and applies to all companies whatever their size or sector.
If your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you may be carrying out a qualifying activity. If your company is creating new products, processes, or services, or modifying existing ones, there’s a good chance you’re carrying out qualifying R&D.

Qualifying expenditure for RDEC is:
• Staff costs, including salaries, employer’s NIC and pension contributions, as well as some reimbursed business expenses.
• Money spent on Externally Provided Workers (EPWs) and some (limited) subcontractor costs.
• Expenditure on materials and consumables like light, power and heat that are used up or transformed in the R&D process.
• Some types of software costs.
• Money paid to clinical trial volunteers.
• Contributions to independent research.

Filing RDEC In 7 steps:

Discharge any liability to Corporation Tax for the accounting period. The gross RDEC rate (13%) is offset against your Corporation Tax liability for the period to which your R&D tax credit claim relates.
Adjustment to reduce the net of the tax amount. To ensure that only the net amount of the credit is payable in cash, if the amount remaining after step 1 exceeds the net value of the credit (gross credit less Corporation Tax), the balance is withheld and carried forward for you to use in future periods.
Limit to PAYE/NIC of R&D staff. The payment of the cash credit is subject to a cap based on the PAYE and NIC paid to HMRC relating to the employees included in your RDEC claim. Amounts over the cap can be carried forward for use in future periods.
Discharge Corporation Tax liability for any other accounting periods. Before the credit is paid in cash, HMRC may offset it against any outstanding Corporation Tax owed for any other accounting periods.
Elect whether to surrender for group relief. You can surrender up to the credit amount available at this step (as well as any amount restricted at step 2) to a group company to offset their tax liability. But you don’t have to do this; you can still receive a cash payment even if other companies in your group have tax liabilities.
Discharge any other liabilities of your company with HMRC. Any amounts remaining at this step will be offset by HMRC against other taxes if amounts are outstanding. For example, overdue PAYE or VAT liabilities.
Cash credit payable to company.

R&D CAP

SME Repayment Cap April 2021
Following the Budget Update on the 3rd of March, it is confirmed that a cap on the amount of cash payable to loss-making companies under the SME scheme is being introduced to prevent potentially fraudulent claims and abuse of the scheme by rogue companies. HMRC has identified entities specifically set up to access the scheme despite having no clear R&D and no prior legitimate activity in the UK. As such action is being taken to ensure that only genuine companies remain able to claim and benefit.

R&D cash credit Cap R&D Tax Claims
In a change from previous guidance, the cap will now apply to accounting periods starting on or after 1 April 2021, giving companies time to prepare for the changes.
The cash credit is limited to £20,000 + 3x total PAYE & NIC liability of the company for the year. (Related party PAYE & NIC liabilities attributed to the R&D can be included within the cap.)
From the definition of the cap above, it follows that if the repayment is below £20,000, then the claim is unaffected. In addition, there are further conditions that influence the applicability of the cap, as noted below:

Cap exemption
The claim can remain uncapped if both of the following two tests are met:
• The company’s employees are creating, preparing to create or actively managing intellectual property arising from the R&D project.
• The Company’s R&D related expenditure on work subcontracted to, or externally provided workers provided by, a related party is less than 15% of its overall R&D expenditure.
Although this will allow greater flexibility and ensure that many claimants are still able to claim in full, there will remain a substantial proportion of companies limited by the cap, particularly larger companies that utilise smaller entities conducting R&D activities within the group. The new rules will particularly affect start-ups with little or no PAYE + NIC contributions, and who place significant reliance on subcontractors to carry out their R&D activities. Such entities often have limited budgets for IP investment and involve large R&D claims to enhance already substantial losses, in the hopes of surrendering these for a large cash credit. This form of the R&D incentive forms a lifeline for businesses that seek to shore up cash flow through this mechanism.
HMRC has issued further guidance in respect of point a) clarifying that know-how and trade secrets are included in their definition of Intellectual Property, meaning the time consuming and expensive process of obtaining formal IP need not be undertaken. This will cover cases where companies are not able or do not wish, to protect the results of their R&D. How this will be monitored remains to be seen so it is recommended that companies maintain good records of their work and any relevant contracts.

Conclusion
Although many claimants aware of this incoming cap will not be constrained by the new rules or can begin to decide to accommodate it, there remains a large proportion who may not be aware of the nuances involved. It is important to ensure that anyone who may be affected is notified about the possibility of a restriction in the potential relief available.

Why has the SME R&D tax credit cap been reintroduced?
To understand the proposed cap, we need to look back to the start of the millennium, when the first R&D incentive was introduced. That initial scheme, while still highly beneficial, came with a restriction – any payable tax credit was capped at the total of a company’s joint PAYE and NIC liability for the period. This mainly affected loss-making and low-profit companies seeking to make use of the new scheme.
It wasn’t until over a decade later in 2012 that this cap was removed. At the same time, the minimum spend threshold of £10,000 was also abolished, meaning a huge boost in the number of innovative companies that could begin to claim under the scheme.
HMRC saw a boom in the number of SMEs claiming and the number of payable R&D credits increased by 22% between 2016 and 2018 to reach £2.2 billion. R&D tax reliefs were proving to be effective, and the government remained committed to its target of R&D investment reaching 2.4% of GDP by 2027.
Notwithstanding the evident effectiveness of the scheme, HMRC began to identify, and tackle, a growing number of fraudulent claims for payable tax credits on R&D work carried out overseas. This fraud totalled more than £300 million and, as a result, a reintroduction of the cap was proposed in the 2018 budget.

The most common mistakes made in R&D tax claims

The most common mistakes made in R&D tax claims

  1. Typical R&D claim

Not all R&D projects occur in laboratories, and your R&D team doesn’t need to wear white coats. Any company in any industry may be eligible to claim R&D tax credits, so long as the company is undertaking development activities that seek to achieve an advance in science and technology. If the project contained a level of technical uncertainty for the competent professionals involved- if there were moments where you and your team weren’t sure how to proceed, or you weren’t confident if your technological goal was achievable – that’s a good indication that qualifying R&D activities were taking place.

  1. Not claiming under the right scheme

The R&D Tax Credits scheme is subdivided into two branches: the SME scheme (or small/medium-sized businesses) and the Research and Development Expenditure Credit (RDEC) scheme for larger companies.

Before making a claim, it’s essential to understand which of these branches your business comes under. Legally, HMRC considers a larger company to have over 500 employees and a yearly turnover of more than €100 million OR a balance sheet above €86 million. A company falling below these criteria is considered an SME and should typically use the SME branch of the scheme.

  1. Non – qualifying expenditure

Everyone wants to maximise the qualifying R&D expenditure in their claims, including the costs of consumable items; for example, the components of a prototype used in testing and the scrapped have always been intended to qualify.

Likewise, an apportionment of water, fuel and power to the R&D activities will be accepted by HMRC.

However, where a company sells or otherwise transfers ownership of items produced in its R&D activity as part of its ordinary business, then the cost of consumable items that form part of those products is excluded from expenditure qualifying for relief.

Using the example above, if the prototype was sold to a customer, even at a discount or gifted to someone else as a goodwill gesture, the costs of the parts could not be claimed as qualifying R&D expenditure. This is the point that other firms often miss, and HMRC could successfully challenge their claims.

  1. Inaccurately accounting for workers outside of the company

Some companies undergo all their R&D projects internally using their employees, but others require work from external parties. When making an R&D Tax Credits claim, accounting for this is complex, but you must get it right. Something as innocuous as IP ownership and clauses around the future use of any IP can potentially kill off an entire R&D claim. It is also incredibly important to understand the differences between subcontracted R&D and work done by Externally Provided Workers (EPWs). Addressing this properly in the early stages of a claim can ensure R&D claims are maximised, particularly under RDEC, where subcontractor restrictions exist.

  1. Not claiming all qualifying costs

There are several areas of R&D expenditure that you can include in your R&D tax credits claim, including costs for staff (salary, employer’s National Insurance and pension contributions, and reimbursed expenses), agency workers, subcontractors, software licenses, and consumable items (light, heat, power, and materials or equipment used or transformed by the R&D process). You don’t want to leave any money on the table, so to make sure your claim includes all qualifying costs, work with your specialist R&D tax credits firm.

  1. Not consulting R&D Tax Specialist

The best way to make a successful R&D tax credits claim is to work with a tax consultancy specialising in R&D tax credit claims. Many companies with specialist knowledge and experience throughout the UK, such as WIM. If you’re not sure if your company was undertaking qualifying R&D activities or which of your activities qualify, it’s best to ask an expert in R&D tax credits. The experts will guide you through the claims process, ensuring that your claim is maximised and meets HMRC’s guidelines. Although it is possible to make an R&D tax credits claim through your accountant (or even on your own), your best chance of making a successful claim is through a specialist R&D tax credits firm.

To learn more about R&D tax credits and whether you should make a claim, please feel free to contact us via email: at info@wimaccountants.com or call us at 02082271700, and we’ll call you back to discuss your project. Our advisors are knowledgeable, professional, and friendly and will help you determine your eligibility at no cost.

R&D claims an “unbelievable” drain on company resources

R&D claims an “unbelievable” drain on company resources


Research & Development (R&D) tax credits have been in the news a lot of late – two significant changes to the scheme are expected to take effect from April 2023 while more imminently, HMRC is investigating the huge volume of what they call ‘spurious’ claims which have increased over the past few years.

R&D tax credits are intended to support companies investing in science and technology projects or schemes. To qualify, companies need to pay corporation tax, and the associated project already should involve either advancement, innovation or research in the science and technology areas. Staff costs, research contributions and software all qualify under the scheme.

Larger companies who claim R&D tax credits under the Research and Development Expenditure Credit (RDEC) scheme are entitled to a 13 percent RDEC rate.

HMRC figures show a 16 percent increase in the number of R&D tax credit claims for the year ending March 2020. This equates to £7.4bn in total support claimed, up 19 percent from the previous year (£6.3bn).

Although, in theory, this paints a positive picture of innovation in the UK, a suspected uptick in spurious claims has sparked concern.

For instance, of the 85,950 R&D claims made, 85 percent were less than £100,000 in value – conceivably an indication of suspicious activity.

HMRC investigations (ongoing): HMRC is now clamping down on ‘spurious’ R&D claims. Their figures show that £612million has been lost through incorrect R&D claims. As part of this, HMRC has recruited 100 additional caseworkers to add a heightened level of scrutiny over R&D claims.

R&D tax credit changes (from April 2023): Chancellor Rishi Sunak announced during the budget that there would be two significant changes to the R&D scheme from April 2023, including:

  • Extension of R&D scheme. Currently, cloud computing and data costs are not included in the scheme. Still, under the changes, the scheme will be extended to include these key areas to recognise the increased use of cloud software and data hosting.
  • Focus on UK-only innovation. From April 2023, R&D claims will be restricted to UK-only activity, affecting companies who subcontract R&D overseas.

Qualifying R&D

  • Certain conditions have to be met in relation to the expenditure, as follows:
  • It must be revenue not capital in nature.
  • It must be related to a trade carried on or to be carried on by the company.

It must be incurred on:

  1. staff costs
  2. software or consumables
  3. relevant payments to the subjects of clinical trials
  4. subcontracted R&D costs or
  5. externally provided workers 

It must not be incurred in the carrying on of activities which are contracted out to the company by any person.

It must not be subsidised.

In respect of expenditure or activities contracted out to the company and subsidised expenditure, an SME is allowed to claim an equivalent to the R&D expenditure credit provided it would be available to a large company in the same circumstances.

In addition, the company must be a going concern. Companies in liquidation or administration are not going concerns.

Consumable R&D tax credit

The cost of items that are directly used and consumed in qualifying R&D projects may form part of the claim for R&D relief. This category includes materials and the proportion of water, fuel and power consumed in the R&D process.

Once your work to resolve the technological or scientific uncertainty is finished, any additional costs for consumables (such as materials for cosmetic fine-tuning or marketing) cannot be included in your claim. It would help if you were careful only to have the consumable costs related to your R&D work – this may differ from the consumable costs for your entire developed material, product, process, or service.

If you have questions or need any help with your R&D claims, please visit our website  wimaccountants.com/ or contact us at 02082271700 or info@wimaccountants.com.

R&D tax credits: what is an HMRC enquiry?

R&D tax credits: what is an HMRC enquiry?

What is an HMRC enquiry?

The government’s R&D tax credit incentives were introduced to help grow the UK economy and reward innovative businesses. HMRC manage and administer the government R&D tax credit incentives. Sometimes this can include an enquiry.

When you submit an R&D tax credit claim to HMRC, HMRC should swiftly process your claim – they try to work to an internal 28-day deadline. In most cases, a simple desktop review of the claim documents will be sufficient for HMRC to be satisfied and process your R&D tax credit claim.

Sometimes, however, HMRC asks for more information to clarify any questions. This process is known as an enquiry.

Why do HMRC open enquiries?

The reason why HMRC might open an enquiry can vary. For example, their reasoning might be related to your company’s change in your circumstances.

HMRC may have some questions about the nature of your R&D work: perhaps about your industry or a particular technology you were working with.

What is an HMRC compliance check?

A compliance check or ‘enquiry’ is essentially an investigation into your R&D Tax Credit claim.

They generally happen when the tax inspector reviewing your tax credit submission finds a discrepancy in your financial data or is unsure whether some aspect of your development work is eligible for funding.

Or is unsure whether some aspect of your development work is eligible for funding. Some enquiries are also launched for random sampling purposes.

To clear up their concerns, your inspector will write to you with a list of questions designed to collect more financial and technical data about your R&D.

Enquiries generally involve multiple rounds of questioning and can take weeks, months, and sometimes even years to resolve.

But while facing an enquiry can be extremely inconvenient, they are a vital mechanism for projecting the R&D Tax Relief scheme for abusive claims and ensuring that UK taxpayers receive value-for-money.

Why does HMRC launch enquiries?

Financial Discrepancies

At HMRC nothing raises a red flag quicker than numbers that don’t add up. If the figure in your claim report – the document containing a breakdown of your R&D costs – don’t match those in your corporate accounts, there’s a good chance your tax agent will initiate an enquiry to clear up the discrepancy.

Insufficient Proof of eligible R&D

To claim R&D tax credits, you must prove that your development work meets the government’s definition of eligible R&D.

You deliver this proof in your technical narrative, demonstrating that you pursued a genuine technological advance by tackling scientific or technical uncertainties through systematic experimentation.

If you fail to prove your eligibility – for example, by talking about business challenges in your narrative rather than technical ones HMRC will launch an enquiry to investigate whether your development work truly qualifies for R&D Tax Credits.

Please visit the link below for more information and if you have any questions, please get in touch with us at WIM Accountants at info@wimaccountants.com or call on 020822717000.

Insight to R&D eligible cost

Insight to R&D eligible cost

What costs qualify for R&D tax credits?

You can claim Research and Development (R&D) tax credits on revenue expenditure, i.e., day-to-day operational costs. But usually, capital expenditure (money spent on fixed assets such as land and buildings) is not eligible for R&D Expenditure within the claim.

Eligible R&D Expenditure

Revenue expenditure includes the following costs, which can be included in your R&D claim:

Staffing costs

For SMEs and large companies, the category can include:

  • Gross salaries (including wage, overtime pay and cash bonuses)
  • Employer NI contributions
  • Employer pension contributions
  • Certain reimbursed business expenses

Any benefits in kind, such as private medical cover and company cars, are specifically excluded from the staff costs category. You cannot include director dividends. And this can affect the value of your claim quite substantially if your directors spend time at work on the R&D activities.

Some employees or directors may be wholly engaged in R&D activities. However, it’s more common for staff to be partially involved in R&D. you should therefore determine the appropriate apportionment to their total staffing costs to include in your R&D claim.

Subcontracted R&D

The costs that you can include for subcontractors also differs between the Research and Development Expenditure Credit (RDEC) scheme and the SME R&D tax credit scheme. If you make an RDEC claim, money spent on subcontractors does not usually qualify for tax relief, but some exceptions are explained below. If you make an SME claim, you can include 65% of payments made to unconnected parties.

SME R&D tax credits and subcontracted R&D

If you are an SME, you can include expenditure on subcontractors involved in R&D projects in your R&D tax credit claim. For ‘unconnected’ subcontractors, payments linked to R&D activities are restricted to 65% for the claim. For ‘connected’ subcontractors, the rules are more complex and based on the nature of the subcontractor’s expenditure.

R&D Expenditure Credits (RDEC)

Through the RDEC scheme, companies can only claim for expenditure on subcontracted R&D if the subcontractor is:

  • An individual
  • A partnership, where all partners are individual
  • A qualifying body (including charities, universities, and scientific research organisations).

The expenditure does not need to be restricted to 65% in the same way as SME claims.

Externally Provided Workers (EPWs)

Staff costs are paid to an external agency for workers engaged in the R&D project. Relief is restricted to 65% of the payments made to the staff provider. Special rules apply if the company and staff provider are connected or elect to be connected.

Consumable

The cost of items that are directly used and consumed in qualifying R&D projects may form part of the claim for R&D relief. This category includes materials and the proportion of water, fuel and power consumed in the R&D process.

Software

You may claim the cost of software directly employed in the R&D activity. Where software is only partly employed in direct R&D, an appropriate apportionment should be made.

It can be complicated to submit an R&D tax credit claim to HMRC’s exacting standards. Get in touch with our Tax Team at WIM accountants for guidance for your R&D claims on info@wimaccountants.com or call our offices on 02082271700

UK R&D geared up for a tech-driven future

UK R&D geared up for a tech-driven future

Significant changes are coming to R&D tax incentives from April 2023. Find out what these changes could mean for your future R&D claims.

HMRC have provided more details on the forthcoming changes to the research and development (R&D) tax incentive with effect from April 2023. To summarise, the changes announced the government’s aim to modernise the regime by expanding the relief to cloud and computing costs, refocusing the incentives on UK based R&D, improving compliance by deterring fraud and error, and finally resolving some flaws of the current rules.

What are the changes?

The proposals are to extend the R&D incentives to acquire datasets used in R&D via a licence payment. However, this is restricted to datasets used only for R&D purposes. If the claimant can sell the dataset or use/commercialise data beyond the R&D project, these costs wouldn’t be eligible.

In addition, could computing costs be eligible if they directly relate to R&D, which would include the computation, analysis, and processing of data for R&D. However, some enormous fees linked to servers and storage would be excluded from the R&D incentives claims?

HMRC also clarifies that staff costs for employees engaged in collecting, cleansing, and analysing data for R&D purposes may be included in the claims.

Refocusing R&D incentives on UK activities

The proposed changes will severely restrict UK R&D tax incentives for overseas R&D. The fundamental changes proposed are as follows:

  • Subcontracted out R&D will only qualify for R&D incentives where the third party undertakes the R&D in the UK.
  • Payment to externally provided workers (workers provided by third party staff providers) will only qualify where the workers’ salaries are paid through UK payroll.

HMRC has asked for feedback on any unreasonable expectations potentially to the application of these wide-ranging rules that could severely restrict R&D claims for international groups and all businesses that undertake R&D activities overseas.

Tackling abuse and compliance

In 2019, UK businesses claimed R&D tax relief of £47.5 billion. The national statistics office estimates businesses only carried on R&D costing £25.9 billion privately financed in the UK by private businesses. Some but not all this perceived gap may be explained by overseas R&D, but clearly, HMRC has concerns over the cost-driven by spurious or excessive R&D claims. The changes aiming to tackle this are:

  • All claims will have to be made digitally.
  • Digital claims will require more details to substantiate the claims (unclear precisely what this means and in what format).
  • Each claim will be endorsed by a named senior officer of the company.
  • Companies will need to inform HMRC in advance that they plan to make a claim (unclear if this is at a project or company level, or what the time frames will be).
  • Claims will need to include details of any agent who has advised the company on compiling the claim.

Changes to address anomalies in the R&D Legislation

Several changes are being introduced, including ensuring the time limits for R&D claims are two years after the end of the claim period, that companies do not fail the going concern test for technical reasons (i.e. there is a transfer of trade) and that R&D tax relief can be claimed provided the expenditure will be paid within two years of the claim period.

 

 

 

 

HMRC ramping up anti-abuse measures for R&D claims

HMRC ramping up anti-abuse measures for R&D claims

 

If you have been following the Autumn Budget announcement you may have noticed that the government highly values UK Research and Development (R&D) . After all, the UK surpasses its international peers in R&D investment at 1.1% of GDP. R&D spending is also set to rise to £22 billion in the next decade, a clear indicator of the UK commitment to cultivating and promoting homegrown innovation. But at the same time adding more incentives will inevitably bring about the increased risk of abuse which HMRC has recognised.

We take a look at the measures HMRC will be enforcing, why they’re needed in the first place and what repercussions can be expected.

 

What’s going to happen?

HMRC have announced that they have hired 100 R&D compliance officers to help tackle the abuse present within the system. It is a welcome action and an indication of firmness from HMRC to ensure that R&D tax credits are available to those who actually have an eligible claim for it.

 

Why are these measures being put into place?

Unfortunately, R&D service providers are unregulated and it comes as no surprise to see many businesses being promised money for an R&D claim but never actually see it because their claim was not eligible. From our own industry experience and reviews, we found that there was an alarming number of submissions made which completely misunderstood the scope of eligibility for an R&D claim. As a result, businesses are losing crucial money paying niche providers for a service that doesn’t exist or simply has no hope in qualifying for an R&D claim. Trust and competency are key elements here, and there are many R&D businesses that do not live up to the bill.

The current state of the R&D market is in need of proper structuring, which HMRC hopes to solve through increased scrutiny.

 

What consequences are there for R&D abuse?

Potential penalties arising from abuse of the incentive will be damaging, financially and legally. HMRC enquiries can last a long time, and they have full right to open enquiries going back 20 years for R&D submissions in that period. Businesses will face high legal costs from defending themselves, and in the event the claim is found to be inauthentic (at best) businesses can expect to have to pay the full claim back, on top of up-front penalties and interest.

Just to give an idea of the scale of the financial damage these penalties could incur, the average R&D claim in the UK is around £60,000 – so a company making fraudulent claims for over 10 years would be penalised for a staggering amount.

 

WIM Accountants are here to help you

We have a thorough understanding of the processes and standards required to stay compliant with HMRC, as well as ensuring our clients are always provided with the best technical knowledge to help them make the most of their R&D claim.

With over 10 years working with R&D tax credit claims, our team of qualified and trained tax specialists are amongst the most reputable to handle your research and development tax affairs.

Autumn Budget 2021: Big changes incoming for R&D

Autumn Budget 2021: Big changes incoming for R&D

 

The Chancellor announced a number of changes, policies and reforms as part of the Autumn Budget – most notable among these for us were the incoming changes to the R&D Tax Credit structure.

 

The Chancellor made sure it was well known that the underlying theme of the announcement was the cultivation of a highly skilled and productive UK economy, so it was almost no surprise to see a vow to increase UK R&D spending to £20 billion annually from 2024/25. Those following the government R&D plan may notice that this is lower than the £22 billion promised last year. Instead, the £22 billion target will be hit by 2026/27, two years later than originally planned. In any case, this is an encouraging sign of growth in the UK innovation and technology sector with the current R&D investment sitting at 1.1% of GDP and forecasted to grow by 1.3% by 2027. In this regard, the UK has shown to be far ahead of its international competition, namely France, Germany and the United States.

The current R&D tax credit scheme is also set to see a shakeup in its qualifying criteria. As expected, cloud computing and data costs were added to the scope of qualifying expenditure for R&D relief. Although more guidance is required from the government on the items defined under the above costs for example, how HMRC defines cloud computing which in itself is a broad concept. The changes are set to be implemented at the start of the 2023/24 tax year, but we can expect further guidance in late autumn.

Brexit meant that the UK was no longer bound by EU non-discrimination requirements, a fact the Chancellor alluded to:

“The second problem is this, companies claimed UK tax relief on £48bn of R&D spending. Yet UK business investment was around half of that, at just £26bn. We’re subsidising billions of pounds of R&D that isn’t even happening here in the UK.”.

Whilst the exact intricacies of the proposal are unknown, it is reasonable to assume that most (if not all) R&D expenditure will have to be domestic in order for it to qualify for the tax relief incentive. There is a clear correlation between this proposal and the government vision for ‘high-skill, high-productivity’ individuals to propel the UK above its international peers. A very optimistic outlook from Mr Sunak, but immediate concerns are to be raised over the feasibility of such a proposal. Consider core science sectors (e.g. life sciences) that often carry out R&D activity outside the UK, especially when conducting clinical trials which may not be able to gain the needed licencing approvals in the UK. Limiting the industry pool will no doubt result in an increase in R&D activity costs.

A review of the R&D tax relief incentive was launched in Spring 2021 with the goal of ensuring that the UK continues to compete as a location for cutting-edge research and evolving into a “science and technology superpower”. The government is expected to respond to the consultation paper published after the review in the following months.

SME vs RDEC: What should you claim under?

SME vs RDEC: What should you claim under?

If you’re planning on making an application for Research and Development (R&D) Tax Credits, you need to know the differences between the two schemes available:

  • The Small-Medium Enterprise (SME) scheme
  • The Research and Development Enhanced Credit (RDEC) scheme

Depending on the size of your company the nature of the incentive you are qualified for could change, so it is important you understand the basics first.

 

What’s the deal with R&D?

Introduced during the turn of the millennia, the UK government announced its R&D tax credits scheme to encourage innovation and growth in UK businesses. It was also a good sign that support for companies, that would have otherwise struggled to keep up with R&D expenditure, was present.

So, if you’ve made a scientific advancement that has either innovated or refined a new/existing technology or product, you can claim back your R&D expenditure as tax relief which can be used to keep your business going and active within its sector.

The three most important tax benefits that can arise from successfully applying for R&D tax credits are:

  • Corporation Tax rebate
  • Payable tax credit
  • Enhanced deductions which can be carried forward

As mentioned above R&D work is considered to be a scientific advancement or refinement, but what HMRC consider to be R&D and what business owners think it is seemed to be two different things. To tackle this HMRC have made it very clear what they consider to be R&D work for tax purposes:

  • Attempting to overcome scientific or technological uncertainty
  • Making progress that is not easily achievable by industry professionals
  • Creating or modifying new/existing products or services

This of course also means tax relief is only available on expenses towards the R&D work such as staffing costs, consumables, subcontractor costs, robotic machinery costs and even software. As long as the expenditure was on a component that directly impacted the R&D project, you can claim for it.

It doesn’t matter if your R&D project failed either, as you still could make claims if you took some risk in making a scientific or technological advancement. HMRC consider if R&D activity was carried out, not just the outcome of the project.

What scheme do I qualify for?

To qualify as an SME your company headcount should be less than 500 and your turnover and balance sheet less than €100 million and €86 million respectively. But not all companies fit this mould, after all, you may have over 500 employees, but your turnover could be less than €100 million. Don’t get your head in a twist though, we’ve simplified it for you:

The SME scheme

As its name suggests, this R&D scheme is aimed towards SMEs and proposes incentives of great benefit to qualifying businesses.

Perhaps the most significant advantage of claiming under this scheme is that it allows profit-making companies to deduct 130% of eligible R&D expenditure from taxable profits – meaning that when added on top of their existing 100% deduction there is a massive 230% total tax deduction!

Loss-making companies don’t lose out either, as they can make claims worth up to 14.5% of their surrenderable loss to use as an immediate cash injection or set against future losses.

 

The RDEC scheme

Large companies with no Corporation Tax liability can also benefit from R&D tax credits, in the form of cash payments or tax reductions. Companies qualified for RDEC can claim back 13% of eligible R&D expenses, which is often big money when you consider the fact that the average RDEC claim is more than £500,000.

RDEC is also an option if your company has already received state aid, such as grants. You may remember recently during the G7 summit in Cornwall, the Prime Minister announced a multimillion-pound incentive for innovators involved with green energy solutions. Even if a small company were to benefit from this grant, they can also claim further tax relief – but only through the RDEC.

 

Get in touch with WIM Accountants today to help you with your R&D tax claim.

R&D Tax Credits in the Food and Drinks Industry

R&D Tax Credits in the Food and Drinks Industry

We all love food and beverages, even more so when there’s something new on the block. Luckily for those of us in the UK, the food and beverage industry is one of the largest (approximately £29bn contributing to the UK economy) so there is a huge investment in research and development to make products taste better, preserve for longer and have better nutritional content. The development process is not limited to just food and drink only, as advancements in manufacturing technology, marketing and even sourcing contribute to R&D activities in the food industry. 

What can I claim tax relief for?

There is a multitude of work done that may qualify for an R&D Tax Credits claim, such as:

  • Creating or developing new flavours or ingredients
  • Enhancing nutritional content
  • Improving taste or texture
  • Making new samples
  • Creating healthier alternatives
  • Developing more sustainable packaging and logistics
  • Thinking up of methods to reduce costs

Unfortunately, despite this list only listing a few of the large number of possible reasons to claim an R&D tax rebate in the food & drink industry, many business owners and individuals are not claiming and are missing out on crucial funding to improve their cash flow. An owner of an SME may want to take particular notice of this.

What types of expenditure qualifies for R&D Tax Credits?

Companies tend to spend a sizeable amount on improving existing/prospective products, refining processes and product lines, as well as additional expenses for packaging, marketing, salaries, ingredients etc. R&D Tax Credits can aid in mitigating these costs by up to 25% and help you continually develop your products further. 

How can I make a claim?

Claiming R&D Tax Credits isn’t easy with many areas of uncertainty. Don’t worry, our team of R&D tax advisors will assist you in constructing high quality, accurate claim that stands up to HMRC interrogation.

As long as a technological or scientific variable is being investigated during your project, usually involving financial risk, R&D Tax Credits are certain to follow. Firstly, we can help you identify all the relevant costs, and to adjust them correctly. We can then put together a detailed, appropriate case, and work on your behalf with HMRC as well.

Why not have a look at our R&D Tax Credits page for more information about how this highly valuable tax incentive could boost your food and beverage company. When you’re ready to make a claim, get in touch with us to get the process started.

R&D Tax Credits 2021: What’s new?

R&D Tax Credits 2021: What’s new?

Did you know that your R&D tax credit claim could be capped?

The Budget 2021 released on 3 March 2021 brought good news for those working with data and cloud-based computing, as it now looks increasingly likely that this will be included in the new scope of tax reliefs. However, what may come as a disappointment for those qualified under the SME or R&D expenditure credit (RDEC) schemes is that there was no increase to the available R&D tax relief. Instead, what SMEs did receive was confirmation that the planned SME cap will come into effect. Businesses that particularly rely on subcontractors to assist with R&D will want to know what changes the new rules will make on their funding.

 

Who will this affect?

You should be aware of these changes if you are:

  • An SME with no or low payroll expenses
  • Planning to claim an R&D tax credit exceeding £20,000
  • Subcontracting R&D work
  • Managing international Intellectual Property (IP)
  • Recharging personnel costs between group parties

 

Why are there changes?

The tax relief is a useful support for companies operating at a loss, with a tax credit worth up to 14.5% of the R&D element of surrendered losses available to claim. Unfortunately, increasing signs of the tax credit being used for fraud and abuse has prompted HMRC to put this measure in place. Perhaps a high-profile example of such fraud is the £29.5m R&D tax relief claim put forward by Convergica (Clinical Information Systems) Ltd, which subsequently prompted a HMRC investigation which jailed three men after 2 years of investigation. This is a sophisticated matter and sadly legitimate businesses can get caught in the anti-fraud net HMRC have cast, so it is important that as an SME, you understand the new rules put in place.

 

The new SME Cap

From 1 April 2021 the SME cap on available credit was set at £20,000 plus 300% of the total PAYE and NIC liability of the company in the interests of preventing abuse. HMRC have also introduced amendments to this legislation in order to ease its introduction:

 

“Where a company has an accounting period that straddles 1 April 2021, the measure does not apply to the part of the period from 1 April, but instead, only affects the next full period starting after that date.”

 

Therefore, a current accounting period is not subject to the new SME cap.

Exemptions for your claim do exist provided that your company meets both of the following criteria:

  • Your employees are creating, preparing to create or managing Intellectual Property (IP). IP refers to intangible creations, such as copyrights, trademarks, trade secrets and patents.
  • Your company does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPW) by, connected persons.

 

How will this affect my business?

As a business with an R&D venture you may want to receive tax credit funding in order to improve your cash flow, as you may receive trading profits and funding is typically reinvested for future projects that also meet the criteria for an R&D tax claim. The idea is that your one innovation paves the way for more future innovations, yet the cap instead risks disrupting cash flow by introducing uncertainty and obstacles for your business.

Fresh businesses looking to explore R&D further will need the tax credit as a way to secure essential cash injection to help them power through the use of external resources and tax losses when they start out. R&D is high cost and high risk, but the cap has the potential to delay this cash injection.

 

How does a subcontractor affect my claim?

As an SME involved in R&D activities, you can claim 65% of the costs paid to a subcontractor for qualifying activities. Similarly, companies under the RDEC scheme can claim the same amount provided that the subcontractor is an individual, a partnership of individuals or a qualifying body. The finer details on what qualifies as subcontracted work is quite broad, as your subcontractor does not need to be UK resident, nor does the work they carry out need to be done in the UK. Furthermore, there is no issue if the work your subcontractor carries it is not inherently R&D if viewed at in a vacuum so long as it contributes to your own R&D work.

 

But what if my subcontractor and I are connected parties?

If you are connected to the subcontractor, for example having a mutual shareholder, your claim for R&D tax credit is different. The amount you can claim can actually be more or less than the 65% available for non-connected parties, but the actual amount itself tends to be reliant on the actual costs involved with the claim and R&D project. The claim will also be for the lesser of the R&D payment and expenditure made to the subcontractor.

 

I think I am affected, what do I do now?

HMRC are strict and resolute in their application of rules and regulations, so if you are affected by the cap you need to take appropriate steps to make sure you aren’t unfairly caught out.

You should review any previous claims and see if the new cap would apply in those circumstances. If you have: subcontracted work domestically or internationally; have staff on low or no salaries; or if your business is new, you will likely qualify under the new cap. We’ve seen how strict HMRC can be and issued enquiries and penalties can be hard to recover from, so you need to have effective planning to mitigate the potential impact of the cap, which is what we can help you with.

HMRC are holding an open consultation which will run until 2 June 2021, with stakeholders being a primary target for thoughts.

WIM Accountants have a thorough understanding and great experience in dealing with R&D tax credit schemes. We offer top class advice and an R&D tax relief service, so you can relax knowing that we will make sure your claim is properly done and will get you the maximum claim you can get. If you have are still unsure about how this change affects you, or want to know more, get in touch at info@wimaccountants.com.

WIM Accountants are here to help businesses with their accounting and taxation needs.

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