Research & Development Tax Relief

Are you missing a trick?

Following the recently published Dyson Report, HM Revenue & Customs (‘HMRC’) are currently considering recommendations to refocus existing R&D schemes on high tech companies, small business and new start ups. The 2011 Budget announced changes to the relief, making it more beneficial to small and medium sized companies. This is not the end of the consultation and review however, further changes have been proposed but have not been legislated. Whatever the final outcome, you should ask yourself whether you are really making enough of the relief?

Recent reports show that since its introduction in 2000/1, more than 20,000 companies have claimed relief under the R&D tax scheme. Putting this in context, in 2008/9 there were 2.27 million active companies registered at Companies House. So is the R&D relief too difficult to obtain? Or are many companies just missing the point? Is your company missing out?

Research & Development tax relief is available for companies of all sizes. It can either reduce a company’s tax bill or in smaller, loss making companies, provide a cash repayment.

But my company doesn’t undertake R&D work!
Are you sure? It may surprise you to know that not all claims for R&D relief are made by so called ‘hi-tech’ companies. In fact in many instances the companies making the claims are themselves surprised that their activities qualify as R&D. For example, would you believe that we have successfully claimed relief for the cost of developing a Lobster Hotel?

The majority of costs that can be claimed are usually more likely to be found in the company’s books allocated to wages and salaries, tool, maintenance and power costs than they are to be found in a nominal code all of their own. They could even be on the balance sheet and not hitting the Profit & Loss account at all.

We’ve only undertaken a R&D project this year – it was a one off.
It does not matter whether it is the first time, or the 8th time that a company has claimed relief. Each claim will be considered separately. Around 30% of claims each year are made by ‘new’ companies, i.e. those making R&D tax credit claims for the first time.

What would we include in a claim? What constitutes Research or Development?
A project is R&D if the project seeks, through the resolution of scientific or technological uncertainty, to achieve an advance in overall knowledge or capability in a field of science or technology, not a company’s own state of knowledge or capability alone.

And what costs can we claim?

What relief could/should my company claim?

1. Up to an additional 100% over and above the relevant expenditure against profits
2. Loss making company – future profits considered likely – carry forward of losses
3. Loss making company – future losses predicted – surrender of some or all R&D losses for cash refund

In 2008-09 only 570 companies claimed a repayable tax credit in the year!

What do we need to do to submit a claim?
HMRC recommend an overview of the claim is submitted with the return.  As HMRC aim to respond to, or approve 90% of R&D credit claims within 30 days of submission, being helpful and upfront at the beginning can be beneficial to all parties.

The claim must be included within the company’s tax return and has to be made within 2 years of the end of the relevant accounting period. If your company has already filed their return for the year in question, HMRC will accept an amended return which includes the R&D claim.

Who deals with the claim?
HMRC have several specialist R&D units set up specifically to deal with all company tax returns that include a claim for relief.

Anything else we need to know? What is the future of R&D claims?
HMRC continue to believe that R&D tax credits are a worthy incentive to innovation in the UK. Currently the scheme is under consultation with all the main players in the accountancy industry and comments are expected on how the scheme currently runs and how any improvements could be made.

The Government announced in the Budget proposed amendments to the scheme. A further increase in the relief to an additional 125% over and above the relevant expenditure, removal of the current £10,000 de minimus spend and the removal of the requirement to have paid PAYE/NI in the year before any repayment is made have all been proposed from 1 April 2012 onwards. These are only proposals currently; however it would suggest that HMRC are keen to ensure more small and medium companies are able to benefit from this relief.

How can we help?
You have the technical knowledge, so let us deal with the R&D technical knowledge. We have experience of submitting successful claims for many different areas of industry and many different sized companies; from claims which have given additional tax relief in the hundreds of thousands, to tax repayments worth tens of thousands for loss making companies.

The first year’s claim submission is critical. Our experience gained in the detailed review of companies’ activities, the interpretation of technical material into accounting information, as well as the creation of information packs to accompany the tax return could be invaluable to you.

Make sure that you take HMRC’s reward for innovation before it becomes an exclusive club!