09 Sep R&D Tax Credits: How to claim them?
Research & Development (R&D) tax credits were first introduced in 2000 (for SMEs) and 2002 for larger companies.
The scheme is hugely popular (recent stats reveal that HMRC currently pay out £1.8bn of R&D tax credits to SMEs annually), due to being a generous and effective form of reducing corporation tax, or as a means of non-equity financing for early-stage companies who are sustaining losses.
Whilst large companies can receive tax relief on up to 100% of qualifying R&D costs, this increases to 230% for SMEs. Loss-making companies can process claims as cash repayments. This can be a particularly useful source for early-stage technology companies who emphasise building up revenues or finding a product-market fit over a path to profitability.
The scheme is designed to encourage innovation within UK based companies, and incentivises applicants to do so by underwriting associated costs, even if the projects are unsuccessful. Whilst the scheme has been in existence for a while, it is worthwhile revisiting the criteria of qualifying costs as HMRC have recently concluded a consultation which recommends for caps to be introduced from April 2020, due to an increased instance of fraud.
Eligibility for R&D Tax Credits
The central tenets of eligibility are based on:
- Spending money on a project which contains technical uncertainty.
- Experimenting with new equipment or manufacturing and production technology.
- Using technology to develop new software, services or products.
- Attempting to advance services through new technological breakthroughs.
Additionally, companies are required to employ less than 500 staff and have a turnover of less than £100 million.
In some instances, R&D can be claimed on grants
Some R&D claim providers in the market take a rather simplistic view for technology companies, and just make claims based on coders and software engineers being on the payroll.
Barnes & Scott’s specialism servicing clients in the fintech, software and technology sectors means that they have the expertise and experience to identify qualifying costs that might otherwise be missed.
Historically this has included processing R&D claims from companies that have received grant funding from organisations such as Innovate UK (who provide grants of up to £10 million for developing innovative ideas and technology.) This has resulted in Barnes & Scott being able to claim R&D on grants for their clients, which in essence means that these companies can benefit from cash payments twice.
Vivacity, a company that uses artificial intelligence to improve traffic insights, had a particularly complex claim, with their Innovate UK funding requiring them to claim for both standard R&D and RDEC (typically utilised by large companies).
Peter Mildon COO of Vivacity says:
“Barnes & Scott’s diligence paid off, as our recent claim ended up being twice as large as was originally planned due to additional claimable expenditure that was identified through their work.”
Changes to R&D tax relief limits
The planned changes related to R&D tax relief were first announced at the 2018 budget, and are set to be implemented from April 2020.
This will result in loss-making companies only being able to make claims up to the value of three times their Pay As You Earn (PAYE) and National Insurance contributions (NICSs) liabilities.
The changes are being proposed to try and prevent future instances of misuse (HMRC has identified and prevented £300m of fraud to date), and to ensure that the scheme is legitimately used to encourage innovation.
Barnes & Scott believe that these measures are being introduced to bring R&D back onshore in the UK. They think that this is the correct approach due to ultimately benefiting the UK economy. Whilst this is something their fintech and technology clients should be aware of it is unlikely to affect most of them due to the cap relating to the entire value of the claim, and not just the part relating to staff involved in the R&D activity.
A streamlined approach
The majority of claims R&D tax services claims delivered by Barnes & Scott are for existing clients.
Running the payroll, bookkeeping and associated compliance activity allows them to have close to real-time visibility on qualifying costs. This means that the R&D process is streamlined, with the firm using this data to populate computations and run calculations promptly.
The input required from companies themselves is relatively light touch, and in most instances requires a short telephone call detailing technical input for the narrative part of the claim. For larger claims a more hands-on approach is warranted, with one of the R&D team from Barnes & Scott sitting down with them for the day.
The person providing this information is normally the acting CTO, or the individual performing the equivalent role. Very early-stage startups tend to put forward their founder to provide this information.
Being ingrained within the financial processes of their clients allows Barnes & Scott to be able to file claims quickly, which is particularly pertinent given the recent delay in processing R&D claims by HMRC. Additionally, the firm is also currently trialling a new service offered by HMRC for making claims online.
Make sure to file your accounts at the same time as R&D claims
Filing R&D claims after the submission of annual accounts, and not amending for the claim in the accounts can have detrimental consequences. Alongside the accounts being inaccurate (i.e. net assets being lower due to the exclusion of the claim value) this can also restrict the ability to pay out dividends for profit-making companies.
Barnes & Scott’s R&D experience means that they have a 100% record of processing claims without any queries or changes from HMRC. This allows them to file annual accounts (adjusted for claim values) and R&D claims at the same time.
The average size of claims for their clients is around £50,000, with the larger claims approaching half a million in cashback to the company.