R&D tax and the impact of loans: what to look out for

In the past year we’ve seen a marked increase in the availability of loans for start-ups that focus on technical innovation. These provide favourable rates and have high acceptance levels, particularly for companies that are pre-revenue. There are also a number of “COVID loans” available, such as the Bounce Back Loan (BBL) and Coronavirus Business Interruption Loan Scheme (CBILS), which has provided some vital cash to keep the lights on during the pandemic.

In most instances, these favourably-termed loans are notified state aid, meaning that there are significant complexities with how they interact with R&D Tax relief. If the loan is deemed to be notified state aid, the same rules apply as if they had received a notified state aid grant. EU regulations require that a single project cannot receive more than one form of notified state aid meaning that, if it is determined that a project has been funded via a notified state aid loan, the project would be ineligible under the SME scheme.

Most of these loans are designed to support working capital commitments rather than specific R&D projects. However, we have seen companies inadvertently impact their R&D tax claim due to how they have allocated the loan. The devil is very much in the detail here and it is important to understand the terms of the loan agreement fully.

Firstly, you need to check to see whether the loan is indeed a notified state aid – something that the loan provider should be able to confirm. If it is, the activities and costs relating to the R&D project should be excluded from the loan application, protecting any tax benefit that would be available under the SME scheme. Instead, check the terms to see if the loan funds can be used for non-R&D expenditure such as marketing or rent, and keep records so that there’s an audit trail to show that there is no-cross over in funding.

Whilst these loans are on favourable terms, they still need to be repaid. It would foolish to restrict the ability to utilise all available relief due to lack of planning, particularly when most of these loans are designed to support the day-to-day running of a business rather than specific R&D projects. With a bit of tax planning it is possible to maximise the overall relief available and get the benefit of both.

If you need any support, or have any questions, contact us and we’ll help.

This post is part of our Entrepreneurial team’s regular series of blogs.

Identifying qualifying R&D in the field of software development

This post is part of our Entrepreneurial team’s regular series of blogs.

The number of Research and Development (R&D) Tax Relief claims made in the computer science and information technology industries has rapidly increased in recent years. With that, HMRC have invested time and resources into educating their inspectors to identify qualifying and non-qualifying activities within software development claims. This is because, although the Business Energy and Industrial Strategy (BEIS) guidelines (that define the qualifying criteria for R&D tax relief) apply equally to all fields of science and technology, HMRC recognised that there had been difficulties in the past in applying them to some software projects and therefore determining whether they were eligible for relief.

As well as training their staff internally, HMRC published guidance for claimant companies to assist them when preparing claims, to accurately capture only qualifying activities and costs. A summary of the key points are as follows:

Advancing knowledge or capability in the entire field

The advance or appreciable improvement being sought needs to advance the knowledge or capability across the whole field of computer sciences and information technology, rather than the company’s own knowledge or capability. Whether the advance applies to the entire industry or only the company can sometimes be hard to ascertain in a fast-moving industry such as computer sciences. This should be considered by a competent professional working in the field and by reference to publicly available information.

Focus on the underlying technology

The technological advance being sought should focus on the underlying technology being developed i.e. the algorithms and methodology, rather than the commercial output of the software. This is because software can be developed to provide functionality that is novel, however the methodology applied to achieve this is routine, and therefore non-qualifying.

How to identify technological uncertainties

As with all other industries, the claimant company must also face technological uncertainties when seeking to achieve the advance. Technological uncertainties arise when how to achieve the aim it is not readily deductible by a competent professional or by applying existing methodology. Examples of technological uncertainties that HMRC provide include:

  • Developing new or improved data architectures that cannot be achieved with readily deducible solutions, e.g. pushing beyond the boundaries of existing readily available database engines.
  • Extending software frameworks beyond their original design, where knowledge how to extend these was not available or readily deducible at the time.
  • System uncertainty when working with multiple components, resulting from the complexity of the entire system, rather than how the individual components behave, i.e. components cannot be assembled into an established pattern.

Separate the R&D project from the commercial project

R&D projects must be carefully defined within the larger commercial project. Any activities that do not attempt to overcome technological uncertainties do not qualify for relief and fall out-with the project for tax relief purposes. Specific activities that HMRC state do not qualify for R&D tax relief include:

  • Planning activities associated with non-R&D elements of the project such as financial, marketing and legal aspects.
  • Development of routine aspects of the software, such as the user interface, rather than the underlying technology.
  • Testing only qualifies if the purpose of the testing work is to feed back into the development, not to validate that it works properly once the technological uncertainties have been resolved.
  • Deployment or release activities that transfer software to production systems generally happen after the uncertainty is resolved and, as such, do not qualify.
  • Maintenance activities or minor fault fixing where no technological uncertainties arise do not qualify.

HMRC are increasing resources in their R&D team and diverting and re-training staff from other areas to enable them to process and accurately analyse the eligibility of claims. Therefore, it is important that companies consider and adhere to the above guidance when making software development claims.

Here at C+T we have extensive experience in preparing R&D claims in the computer sciences sector and our report to support a claim is designed to give HMRC all of the information it requires to assess its eligibility and prevent an enquiry being opened to request more details.

Our team of experts are on hand to help you through the claim process, give you peace of mind that all relevant factors have been considered, and significantly reduce the risk of an enquiry. If you have any questions, get in touch and we can advise.

If you would like further advice regarding the availability of Research & Development Tax Relief relief, please get in touch with us.

Key points from a recent case about Research and Development tax relief

This post is part of our Entrepreneurial team’s regular series of blogs.

First Tier Tribunal cases and their decisions can provide useful clarification about R&D tax relief and how HMRC expects the guidance and legislation to be applied.

In this blog, I’ve summarised the facts of the Hadee Engineering Co Ltd v HMRC case from October 2020, looking at why the taxpayer lost and the key points to take away so you don’t fall foul of the same mistakes.

Costs

The court found that the taxpayer had, incorrectly, overstated salary costs and claimed for bonuses that were actually in the accounts for a previous period.

It was also found that there was a lack of evidence in relation to payments for materials and subcontractors. The taxpayer could not provide any evidence that these costs were incurred by the company or within the time period of the claim.

In addition, time and expenditure incurred on non-qualifying, routine activities were being claimed for, and the apportionments applied could not be justified.

Key points to take away:

  • It is important to remember that costs are only eligible for R&D tax relief if they are deductible for corporation tax purposes within the accounting period of the relevant R&D claim. Including costs from a different period or costs that are not deductible in calculating the profit of the trade is a breach of the rules (HMRC guidance CIRD81450).
  • While HMRC don’t require companies to keep detailed records, at a minimum a claimant company should be able to produce invoices and bank statements to confirm that these costs were incurred and within the relevant period. The “competent professionals” involved in the projects must understand what activities qualify for R&D tax relief, so they can arrive at ‘just and reasonable’ percentages to be applied to costs, that reflect the extent to which they were involved in the qualifying activities. If they are ever asked, they can then justify the approach taken to HMRC.

What is a competent professional?

Only one individual was provided by the company as a competent professional, but was unable to provide the relevant technical detail to allow HMRC to assess the qualifying nature of the projects. This meant that HMRC was unable to confirm that the projects included in the claim did actually qualify as R&D for tax purposes.

Key points to take away:

  • We often refer to competent professionals in the course of preparing an R&D claim, because HMRC sets this as the test for assessing whether an activity meets the criteria of qualifying R&D. Although the term ‘competent professional’ is not explicitly defined, they are qualified or time-experienced members of staff within the area of science or technology of which the advance is being sought.
  • These individuals need to be involved in the R&D claim process to some extent as they are required to provide the necessary supporting technical detail to enable HMRC to assess the eligibility of the projects. They are also required to provide the qualifying percentages that are applied to costs.

Supporting evidence

The case raised issues with the level of evidence provided by the appellant in support of their claim. HMRC argued that it was inconsistent, incomplete and did not address the key criteria which need to exist for activities to qualify for R&D tax relief.

Key point to take away:

  • While there is currently no standard format or template in which supporting evidence for a claim should be submitted to HMRC, it is pushing for more consistency. As such, HMRC has recently provided guidance for the type of information that should be included and clarified how many projects evidence needs to be submitted for.

Existence of a project

One of the requirements for qualifying R&D activities to be taking place is for the existence of a project. HMRC argued that there was no evidence that any projects existed within the claimant company. They stated that, for a project to exist, companies should have detailed evidence and records in-house that substantiate the plans and activities carried out.

Key points to take away:

  • Again, there is no specific definition of what constitutes a project in the R&D guidance or legislation. The judge in this case referenced the dictionary, stating that a project was a “plan or scheme; a planned undertaking” and agreed with HMRC that a formulation of a plan is required for a project to exist.
  • Companies claiming, or planning to claim, R&D tax relief should be aware that some form of record or documentary evidence is expected and, if that’s not possible, a competent professional is required to provide a detailed explanation. This again highlights the need for technically-detailed and structured supporting evidence to be submitted in support of a claim.

What constitutes subcontracted R&D?

A number of the taxpayer’s projects were undertaken in conjunction with customers. HMRC argued that the projects would be considered to be subcontracted because the company was commissioned to design bespoke products for customers. This meant that, if the projects did involve qualifying activities, they would be only eligible for relief under the RDEC scheme. (The RDEC scheme is open to large company and SMEs which do not qualify for the more lucrative SME R&D Tax Credit scheme. It is notably less lucrative, but still worth considering submitting a claim for.)

The judge referred to the contracts in place between the two parties and primarily focused on the economic risk, where in this case the claimant company was paid on an hourly basis for the work undertaken. As the taxpayer did not bear any economic risk, it was ruled that the projects were subcontracted. To further support the ruling, the customer on one project had successfully filed a patent for the design work carried out by the claimant company.

Key points to take away:

  • There is limited guidance available to assist in determining whether a project is subcontracted or in-house for R&D purposes. The three main points that should be considered are:
    • The ownership of the arising intellectual property;
    • Who bears the economic risk; and
    • The degree of autonomy enjoyed.
  • These points should always be considered when drawing up a contract with a customer when you will be undertaking qualifying R&D activities. If, for example, the contract supports that you retain any arising IP, you bear the cost of any project overrun and you have autonomy over how the work is conducted, then the project will still be eligible for relief under the more generous SME scheme.

Final thoughts

Ultimately, the court found that only one of the projects was eligible for R&D tax relief (though the amount of qualifying expenditure on that project is still in dispute).

In light of the coronavirus pandemic, HMRC is dedicating more staff to process R&D claims. While this means that we are generally seeing HMRC pay out claims quicker, it also means that HMRC has more resources to look into, and potentially enquire into, claims.

Here at C+T, our report format is designed to give HMRC all of the information it requires to assess the eligibility of a claim, to prevent an enquiry being opened to request more details. We also have experience in dealing with all of the complex factors that need to be considered when preparing an R&D tax relief claim, including contractual arrangements, which HMRC specifically scrutinised in this case.

Our team of experts are on hand to help you through the claim process, to give you peace of mind that all of the relevant factors have been considered and the risk of enquiry is significantly reduced. If you have any questions, get in touch and we can advise.

Welcome to our Research & Development week!

This week we will focus on the work of our Research & Development Tax team, highlighting the work they do for clients; sharing hints, tips and advice on how to utilise R&D Tax relief; and hearing directly from clients themselves on how they have found working with us.

One of the most generous corporation tax reliefs currently available, R&D Tax relief is designed to encourage innovation and increase spending on R&D activities. You can claim back money that you spend on research and development to offset against current or future tax bills.

The team are tax experts first and foremost, and combine inside-out knowledge of R&D with a deep understanding of the wider corporate tax position. Dealing with over a hundred claims a year, we understand HMRC’s language and can advise on the impact a relief claim will have on your tax position, compliance and strategy.

If you are thinking of making a claim for R&D Tax Relief, or not sure if you would qualify, contact David and our team of experts today.

Key questions to ask a research and development tax adviser

David Philp, Head of Research & Development Tax Relief at Chiene + Tait, provides a step by step guide for businesses to use when approaching an Research & Development Tax adviser about whether a project qualifies for the relief.

Whilst there are a number of good, tax-focused, R&D advisers operating within the UK, there are also a number of ‘experts’ who resort to cold-calling, and wrongly advise that a company can quickly and easily qualify for relief.

HMRC can take their time opening enquiries into a company’s tax affairs and any erroneous R&D claim will be required to be repaid plus penalties/interest and can be a red mark in any due diligence process, should the company be sold in future.

With HMRC actively taking steps to combat fraudulent tax claims and the UK entered into a recession, access to cash is essential and therefore it is more important now than ever to pick the right R&D tax adviser to help with a claim.

Here are a couple of questions I would ask if I were a company looking to find the right supplier:

Are they accountable to a relevant professional body such as ICAS or CIOT?

There is currently no regulatory body for R&D tax specialists. There is, however, the recent Professional Conduct in Relation to Taxation (PCRT) guidance specifically created for R&D tax advice.

Any reputable R&D tax adviser worth their salt will already be a member of one of the PCRT bodies and adhere to the 5 fundamental principles:

  1. Integrity
  2. Objectivity
  3. Professional competence
  4. Confidentiality and
  5. Professional behaviour

By choosing and advisor that is accountable to a relevant professional body, it will give you the assurance that the work completed is up to the minimum quality standard you should expect from an advisor.

Is the person preparing the claim a tax adviser?

An R&D claim is a tax incentive first and foremost. It forms part of a company’s tax return and is subject to tax legislation. It is important to find an adviser that understands HMRC language and the impact that a relief claim will have on the company’s overall tax position, compliance and strategy.  This allows the adviser to identify eligible projects and costs under the scope of the legislation, maximising the available relief whilst minimising the risk of an enquiry.

What experience do they have of making a claim?

The tax legislation is constantly changing, particularly R&D tax with a number of consultations currently ongoing. Make sure that you pick an adviser that has lives and breathes in the legislation. An adviser dealing with a lower volume of claims may not be as knowledgeable in this specialist area where it helps to work day-in, day-out.

Do they charge extra to deal with an enquiry?

Enquiries are HMRCs way of asking for further information before making their decision. They can, however, take significant time and effort to resolve. The costs associated to an enquiry can therefore spiral.

 

Hopefully this has given you some good pointers to keep in mind. If you are unsure about whether you can make a claim for R&D, feel free to contact David and his team at Chiene + Tait at rdtax@chiene.co.uk or call 0131 558 5800.

Research & Development Tax Relief: ways to maximise your claim

Our team of full-time Research & Development (R&D) Tax Relief specialists has highlighted the key areas where there are opportunities to maximise your R&D claim that can be commonly missed:

 

Grant funding

Companies often incorrectly believe that receiving grant funding means that they are not eligible to claim R&D tax relief. This is not the case; the receipt of a grant can, however, impact upon the level of relief a company is entitled to claim.

Depending on the type of grant received it can cause some or all of the qualifying project expenditure to be ineligible under the R&D SME scheme, potentially for the entire life of the project. A specialist R&D advisor will be able to apply the detailed legislation to each of your projects to ensure you claim the maximum amount of relief you are entitled to.

An experienced advisor will also be able to help you to proactively maximise your R&D claim in relation to grant funding. If you are considering applying for a grant, our team can guide you on how to structure your application to ensure that it does not adversely impact upon your R&D claim.

Customer contracts

There is also a misconception that when a company has been approached by a customer to undertake R&D that these activities are not eligible for relief. In fact, depending on the factors specific to each engagement you may still be eligible for relief. Our specialist R&D team can review customer contracts to determine if a claim is eligible and we can also proactively review contracts to ensure any new projects are eligible.

Investments

A claimant company is required to include the accounting data of other entities if they are considered to be ‘linked’ or ‘partner’ enterprises. Aggregating this data can cause a company to breach the SME thresholds for R&D purposes, making the company ineligible for relief at the preferred rate.

This is something that should be considered when carrying out an investment round. Our R&D team can advise whether a proposed investment will breach any of these limits.

Dividends

It is common for directors to take dividends, rather than putting themselves on the payroll, to avoid paying money through the PAYE scheme that could otherwise be invested back into the business. However, dividends are not a qualifying cost for R&D tax relief purposes and, as such, cannot be included in a claim.

As employees’ and directors’ gross salaries are a qualifying cost, it may be worth considering adding any directors to the payroll and paying them below the personal allowance and national insurance thresholds, so no PAYE or NIC are payable, and pay any further remuneration as dividends.

Staff versus Freelancers

In the early stages, many companies will outsource work to specialists or utilise subcontractors and agency workers. For SME claims, costs spent on engaging with subcontractors and agency workers will be restricted to 65%. Furthermore, if you are claiming under the RDEC scheme, there are multiple restrictions on third party costs – as well as a payable PAYE/NIC cap. This means you may not be able to claim any of the costs incurred.

Third party costs

Subcontractor and externally provided worker costs, in most cases, require a statutory restriction of 65% to be applied. However, if a third party is considered to be ‘connected’ to the claimant company or if an election to be treated as connected is made, relief for 100% of the costs can claimed.

Here at Chiene + Tait, our R&D specialists have years of experience preparing and submitting successful claims for hundreds of companies, across both R&D schemes (RDEC and SME), in multiple industries.

If you are considering claiming relief and would like to hear how we can help you, please email us at RDtax@chiene.co.uk.

 

How can R&D tax relief help cashflow during the recession?

In this blog, Eilidh Hobbs in our Research & Development Tax Relief team highlights how the relief can provide a lifeline for qualifying businesses during the current recession.

Most, if not all, businesses have been affected in some way by Covid-19. Some have been lucky enough to see a surge in demand due to the nature of their business, but unfortunately many have been negatively impacted. This meant that management have had to move their focus away from long-term strategy, to managing day-to-day cashflow.

HMRC have introduced a number of temporary schemes and incentives specifically to support companies through the unprecedented pandemic. However, there are other permanent schemes that can also help businesses through these trying times, such as R&D tax relief.

Many companies are carrying out qualifying R&D activities but have not considered claiming tax relief in the mistaken belief that they don’t fit the conventional image portrayed of a pure R&D company.

HMRC’s definition of R&D applies to all industries and as long as your business seeks to achieve an advance in a field or science or technology, and in doing so is required to overcome scientific or technological uncertainties, you will qualify for the relief. The definition is wider than you would think. Chiene + Tait’s dedicated R&D specialists are happy to discuss any projects your business has undertaken to assess whether you may be eligible to claim the relief.

A claim can result in a generous cash tax credit, or a reduction to tax liabilities and you have two years from the company’s financial year end to make a claim – so you can benefit from activities and R&D investment in prior periods; up to three years prior. The benefit may also be with you quicker than you would expect as HMRC are currently aiming to process SME claims within 28 working days.

If you have a query about Research & Development Tax Relief, or wonder if your company can apply, contact Eilidh today on 0131 558 5800 or email eilidh.hobbs@chiene.co.uk.

Research & Development Tax Relief: common misconceptions

There are several big misconceptions surrounding Research & Development Tax Relief – we come across them on a near-daily basis. Despite it being one of the most generous corporation tax breaks available, many people rule themselves out without looking into it in greater detail. But if you do look into it, you might be surprised at what qualifies for R&D Tax Relief.

Dave Philp, Head of R&D Tax at Chiene + Tait, looks at the misconceptions you might have heard.

“We haven’t created anything new so we aren’t eligible”

This simply isn’t true: you don’t need to be breaking new scientific ground to qualify. R&D tax relief covers any project that seeks an advance in science or technology. As well as creating an innovative, state-of-the-art product, this can also mean simply improving upon existing processes. If you have:

  • Been working on something that has never before been attempted;
  • Tried to improve their existing products through technological change; or
  • Looked to find a more efficient way to work,

then you will likely have scope for an R&D claim.

“We have received grant funding so can’t make a claim”

Not correct. However, receipt of a grant does throw a spanner into the works. You can still make a claim, albeit the grant may limit the total tax credit/deduction that you will get back. The legislation around grants and how they interact with R&D tax relief is extremely complex, so I always recommend speaking to a specialist to ensure that you maximise your claim.

“But we don’t focus purely on R&D”

R&D tax relief is available to companies that attempt to overcome technological or scientific uncertainties through the use of untried and untested techniques. It doesn’t matter if that is the company’s sole purpose, if there is innovation as part of the process, there will likely be a claim. That means that companies from a range of different sectors can qualify for relief.  In the past 12 months, Chiene + Tait has worked with (but not limited to) companies in the following sectors:

  • Software
  • Electricity and Gas
  • Manufacturing
  • Financial & Insurance
  • Life science
  • Construction

 “It’s not worth the time to make an R&D tax relief claim”

Companies can receive a tax credit up to 33% of the total eligible expenditure incurred. So, if you spent £100k on eligible staff costs, you could receive up to £33k tax credit, cash in hand

Granted, the rules and application process is complex and can seem daunting, but you can remove that hurdle by using a good adviser.

If you’d like a discussion about whether you can claim R&D tax relief, or if you have any questions about it, get in touch with me at david.philp@chiene.co.uk.

COVID-19 Pivotal Enterprise Resilience Fund Reopens but with strings attached

Breaking news – the Scottish Government has announced that they plan to reopen the Pivotal Enterprise Resilience Fund next week (w/c 11th May, final details to follow) after they were inundated with applications over the first weekend of applications. The pot will swell by another £45m (£90m allocated to the fund in total) for businesses that meet the criteria but be aware – you may have an issue claiming from the Fund if you have received other ‘state aid’ such as Research & Development Tax Relief. More information will be shared by the C+T team when confirmed.

R&D Tax credits and Grants – how to maximise relief

Grants are an essential tool for growing a business, but did you know that by receiving a grant, it could restrict your company’s ability to claim further Research & Development (R&D) tax reliefs and incentives? In this article, Dave Philp Chiene + Tait’s Head of Research & Development Tax outlines the implications of receiving a grant and its impact on eligibility to receive R&D Tax Relief. Background reading on R&D Tax Relief, and its associated schemes (the SME and RDEC schemes) can be found in a previous article by Dave here.

There is a myth that, if a company receives a grant, it cannot claim R&D Tax relief. Whilst this is untrue, receiving a grant can throw a spanner in the works.

In a bid to guarantee a level playing field for European businesses, the European Commission restricts one Notified State Aid per project. That means if the company has already received Notified State Aid for a project, that project will not qualify under the R&D SME scheme. Any projects that have been in receipt of Notified State Aid will instead fall into the less beneficial RDEC scheme, where companies can claim 10p to the pound, rather than 33p.

Unfortunately, it is not possible to repay the Notified State Aid. Once received, the project is automatically excluded from claiming R&D tax relief under the SME scheme for the entire length of the project.

There are, however, some things that you can do to avoid any potential pitfalls. By following the tips below, it is possible to maximise your claim by combining both grants and R&D tax relief:

Know what type of grant you are applying for – firstly, not all grants are classed as Notified State Aid. As such, not all grants will qualify you for the less advantageous RDEC scheme. De-Minimis Aid, which offers up to €200,000 worth of funding, is not classed as Notified State Aid and will therefore not force the project into the RDEC scheme. In this instance, it is possible to split relief over the two schemes: subsidised expenditure will fall under the RDEC scheme, whilst the remaining unfunded expenditure will remain qualifying under the SME scheme.

Determine what project the grant relates to – the rules apply on a project-by-project basis, not on the total R&D work undertaken in the year. If you have received Notified State Aid in relation to one project, this does not affect your ability to claim under the SME scheme for any remaining projects. Likewise, if you have received Notified State Aid in relation to non-R&D activities, this will not affect your SME claim.

Look at the long-term implications – remember, once you have received Notified State Aid in relation to a project, that’s it: there is no way back. Try to consider the long-term implication of receiving the grant and how it will affect future claims. Taking a small £10,000 grant at the early stages of a R&D project may help cashflow in the short-term, however this could also affect the ability to claim R&D tax relief in future years.

Speak to people who know R&D tax relief – R&D tax relief is an ever-changing, complex area of legislation and it really does pay to speak to an expert to ensure that you are maximising your claim, whilst also planning ahead to avoid any potential pitfalls.  A quick chat at the beginning of a project can provide you with a clear and proactive action plan, leaving you with more time to run your business!

If you have any queries about R&D tax relief, Notified State Aid or De-Minimis State Aid related to investment, contact Dave Philp today at entrepreneur@chiene.co.uk.

Business must prepare for R&D tax relief crackdown

In this blog, Dave Philp Head of R&D at Chiene + Tait outlines the implications of a potential clampdown on spurious research and development claims to HMRC.

R&D (Research and Development) Tax Relief, introduced in 2000 to encourage more company investment into innovation, is more popular than ever. In 2017-18, UK companies submitted over 48,000 claims for R&D tax credits. A total of £4.3bn in tax relief was secured, an increase of £1bn from the previous year. Here in Scotland, £175m in R&D tax relief was secured by businesses in 2017-18. While this rise in claims is positive, suggesting more UK businesses are focusing on innovation as a way to make themselves competitive, there are also concerns about illegitimate claims being submitted.

HMRC is now taking steps to combat fraudulent claims, reporting that it has already identified and prevented half a billion pounds of fraud linked to R&D tax credits. Last year the Government announced it would re-introduce the PAYE and NIC cap on SME payable credits, a move aimed at preventing fraud within structures set up to claim a tax credit despite there being no evidence of UK-based innovation activity or job creation.

Following the internal re-structuring of HMRC’s R&D tax teams last Autumn, it was also announced in the Queen’s speech that the Government would create a single, beefed-up, anti-tax evasion unit to cover all taxes and introduce new anti-avoidance measures. This potential forthcoming clampdown on R&D tax credit abuse in the UK follows a similar process carried out in Australia in 2018 which sent shockwaves through that country’s software sector. The Australian Government’s crackdown had significant impact with companies, including the tech firm Airtasker, being ordered to pay back millions of dollars they had received in R&D tax breaks.

While a number of businesses there were caught on the hop, the Australian Tax Office had made clear a year earlier of their intention to review R&D claims from software companies. This came amid concerns that advisory firms were encouraging companies to claim for work, which didn’t count as pure R&D. Despite the British Government getting set to impose greater scrutiny here, its support for R&D tax credits is unlikely to dissipate, especially with the UK having just completed its withdrawal of the EU.

Indeed, the new Boris Johnson-led administration has stated that it will review the definition of R&D, mainly to further incentivise cloud computing and data projects. It has also announced it will increase the R&D Expenditure Credit available for large companies and grant-funded projects. Potential abuse of R&D tax relief claims is, however, likely to be subject to much closer scrutiny going forward. To assist this process, one of the areas that the Government should be focused on is tougher regulation for those who advise companies on R&D tax relief.

Whilst there are a number of good, tax focused, R&D advisors operating within the UK, there are also a number of ‘experts’ who resort to cold-calling and wrongly advising that a company can easily qualify for relief. HMRC can take their time opening enquiries into a company’s tax affairs and any erroneous claim will be required to be repaid, along with potential penalties and interest. It will also likely be a red mark in any due diligence process, should it wish to be sold in future.

While other business advisory professionals, such as accountants and lawyers, must rightly conform to regulation and governance from their respective industry bodies, there is currently no such body to regulate R&D specialists. New regulation in this area would help to ensure companies are not put in risk at making an illegitimate claim.

Time will tell if the UK’s R&D tax credit crackdown will prove to be as harsh as what occurred in Australia.  There is, however, no doubt that companies need to consider whether they meet HMRC’s definitions as set out in the tax legislation and guidance with sufficient back up to support their claim. For those companies that are unsure of this process it is important they work with a credible and established adviser, ideally one that is currently governed by an industry code of conduct.

Construction Firms Missing Out on R&D Tax Relief

Construction firms are missing out on millions in available tax incentives. A recent HMRC study showed that there has been a lower-than-expected take up of Research & Development Tax Relief (R&D) in the sector.

R&D tax relief (further info can be found here) is one of the most generous corporation tax breaks available, designed to encourage innovation and increase spending on R&D activities. It provides vital funds that help cash-tight companies to keep the lights on and pay suppliers. £100k of qualifying expenditure under the SME scheme can get you either:

  • £230k worth of enhanced losses (worth £44k @ 19% tax rate); or
  • A £33.35k tax credit (cash in hand)

The construction sector is innovative by nature. Modern methods of construction & Building Information Modelling (BIM) have led to the development of new ecological and sustainable technologies that are used day-to-day in the sector. There was surprise therefore when the study showed that construction accounted for less than 3% of all R&D claims submitted.

The lower-than expected figures can likely be explained by a lack of awareness of the R&D Tax Relief in the sector, along with concern that the work undertaken does not qualify. There is also a misconception that R&D tax relief is only available for technology start-ups or scientists in lab coats. This is just simply not the case.

Where Companies are adapting equipment, creating new processes or developing better, safer or greener methods of construction, they will almost certainly be undertaking R&D.

Chiene + Tait has a specialist R&D team that can help identify what can and cannot qualify for relief. In the past 24 months, we have successfully submitted over 80 R&D tax credit claims resulting in over £2.5 million being received by our clients, achieving a 100% success rate.

Are you missing out on Research & Development Tax Relief?

In this blog, David in the Chiene + Tait Entrepreneurial Tax Team highlights Research & Development Tax Relief and asks – are you missing out?

Scottish companies received over £165 million in Research & Development (R&D) tax credits last year. Yet a recent HMRC study showed a number of industries are still failing to claim R&D tax relief, when they could be eligible. I’ve produced an infographic on which sectors can claim the relief but traditionally don’t here.

There is a misconception that the relief is only available for technology start-ups or scientists in lab coats. This is just simply not the case, so is your company missing out?

What is Research & Development Tax Relief?

Research & Development tax relief is one of the most generous corporation tax relief currently available. The relief is a HMRC incentive designed to encourage innovation and increase spending on R&D activities, however, many companies incorrectly believe that they don’t qualify.

The relief can be extremely beneficial. Under the scheme companies can receive a tax credit or enhanced deductions to reduce their tax bill, that means £100k worth of qualifying expenditure can get you either:

  • £230k worth of losses (worth £44k @ 19% tax rate) to utilise against future profits or
  • £33.35k tax credit (cash in hand)

Essentially this means that if your company has tax to pay, you will pay less. If not, the Company will receive a tax credit.

What is R&D?

In the eyes of HMRC, R&D is a project that seeks an advance in science or technology through the resolution of scientific or technological uncertainties.

An advance in science or technology is an advance in the overall knowledge or capability in a field of science or technology (not a company’s own state of knowledge or capability alone). This can also include a project that seeks to make an appreciable improvement to an existing process. In layman’s terms, if you are seeking to create something new or improve upon an existing process, it will likely qualify for the relief.

Even if the advance in science or technology sought by the project is not achieved, R&D still takes place. This means that costs relating to aborting a project could also qualify for R&D.

Available for all – not just people in lab coats

With such a broad definition, thousands of companies are missing out. Below are just a few examples of projects that have qualified for relief in the last year:

  • Creating a new recipe for a soft drink to adhere to the new sugar content regulations
  • Improving upon an existing manufacturing process
  • Creating a bespoke multi-functional piece of furniture
  • Building a software infrastructure that’s more efficient than its competitors
  • Developing an in-house Customer Relationship Management system

None of these are ’traditional’ R&D projects but all qualified for R&D tax relief. Some tips to keep in mind when considering if your project will qualify is to ask yourself the following:

  • Has a technological advancement been made?
  • Is the company working on something that has never before been attempted?
  • Has the company tried to improve their existing products through technological change?
  • Has the company found a more efficient way to work?

If your answer is yes to any of these then there will likely be scope for an R&D claim. Your next step should be to speak to an R&D specialist to determine the size of the claim and to ensure that you don’t suffer any pitfalls!

Chiene + Tait has a specialist R&D team that can help identify what can and cannot qualify for relief. In the past 24 months, we have successfully submitted over 80 R&D tax credit claims resulting in over £2.5 million being received by our clients, achieving a 100% success rate. If you would like to watch a webinar outlining these points, please visit the Chiene + Tait You Tube channel here.

If you would like a no obligation meeting to discuss R&D Tax Relief and whether you can apply, please contact me at david.philp@chiene.co.uk or call 0131 558 5800. Alternatively, I’ll be at the Investing Women Ambition & Growth Conference on 8th March and happy to chat further.

Kirsty Paton in our Entrepreneurial Tax Team has also written a blog about Understanding Investment. To read this article click here.

Research & Development Tax Relief, and reimbursed expenses – HMRC has changed its tune…again!

Reimbursed expenses forming part of a Research & Development (R&D) tax claim have always been a tricky subject. Initially, reimbursed expenses were allowed and explicitly included in R&D tax legislation. HMRC then issued guidance in 2014 contradicting this, stating that staffing costs were intended to cover contractual costs only. There has been much to-ing and fro-ing on this point, however, HMRC have finally updated their guidance, clarifying the treatment of reimbursed expenses.

In the updated guidance published in July 2017, HMRC clarified that expenses, which are initially borne by the employee and incurred in order to fulfil R&D duties, fall within the definition of qualifying staff costs.

In layman’s terms, this means that if an employee has incurred travel costs attributable to a R&D project and are subsequently reimbursed, the company can claim these costs as qualifying R&D expenditure. This is only true for reimbursed costs so, for example, if the employer has already arranged and paid for the travel costs to and from the R&D project site, these costs would still be ineligible.

This results in the potential underclaim of previously submitted R&D claims. Luckily, HMRC have acknowledged this and extended the usual timelimits to amend a previously submitted R&D tax claim. If the claim:

  • Was submitted on, or after 9 October 2014; and
  • Is in respect of accounting periods ending between 9 October 2014 and 31 January 2016

The company is eligible to amend the R&D tax claim past the standard 2-year period and has until 31 January 2018 to do so.

Chiene + Tait’s R&D tax team specialises in enhancing the value of previously submitted R&D tax claims and, in the past year, have help clients claim over £1m in tax credits from HMRC. If you think your company would benefit from our expertise please contact Dave Philp on 0131 558 5800 or email mail@chiene.co.uk.

 

Grants v R&D tax credits – How to have your cake and eat it too!

In this blog David Philp in our Entrepreneurial Tax Team highlights how receiving grants can restrict a company’s ability to claim other tax reliefs such as R&D tax credits.

 

Grants form a vital part in the startup lifecycle, providing critical financial support to innovative companies. They give companies cash at a time when they are unlikely to have profits or even an income stream. The cash can be used to invest in further development, or to just keep the lights on for another couple of months.

However, as the saying goes “you don’t get anything for free” – receiving a grant could restrict the company’s ability to claim further tax reliefs and incentives.

Research & Development (R&D) Tax Relief (further info can be found here) is one of the most generous corporation tax breaks available, designed to encourage innovation and increase spending on R&D activities. It provides vital funds to startups in the early years of their development. There are two R&D schemes that run in parallel: the SME scheme and the RDEC scheme.

To qualify for the SME scheme, the company must have fewer than 500 employees and either have an annual turnover of less than €100m or gross assets of less than €86m. The SME scheme is by far the more beneficial out of the two available. For every £1 the company spends on qualifying R&D costs, the company can receive 33.35p in tax credits. This is a significantly higher level of relief than the level available under the RDEC scheme, which provides an 8.8p (which for expenditure after 31/3/17, increases to a whopping 8.9p) tax credit for every £1 spent on qualifying R&D costs (there are also further restrictions on what expenditure qualifies under the RDEC scheme).

The main issue that arises is that, as the SME scheme is so advantageous, the relief itself is deemed to be Notified State Aid. A Notified State Aid is one where the European Commission has been notified of the grant’s existence. In a bid to guarantee a level playing field for European businesses, the European Commission restricts Notified State Aids to one per project. That means if the company has already received Notified State Aid for a project, that project will not qualify under the SME scheme.

Unfortunately, it is not possible to repay the Notified State Aid. Once received, the project is automatically excluded from claiming R&D tax relief under the SME scheme.

This can have a disastrous effect to the availability of future relief for the company, which is best shown by the example below. Let’s assume that a loss-making fintech company (SME) is developing a single R&D project, spending £250,000 on R&D-qualifying staff costs and £70,000 on costs which were subcontracted to another company. To help with cashflow they also applied for a grant of £40,000.

Option AOption B
No Grant Received£40,000 Notified State Aid Received
Loss Making
SMERDEC
Qualifying Costs
Staff costs250,000250,000
Subcontractor costs (SME – restricted to 65%, RDEC Scheme – ineligble)45,0000
Less: Grant received (ineligible under SME Scheme, instead eligible under the RDEC scheme)0 0
Qualifying costs under the SME scheme295,5000
Qualifying costs under the RDEC scheme0250,000
Tax Relief
SME scheme – tax credit worth 33.35% of qualifying costs98,5490
RDEC scheme – tax credit worth 8.8% of qualifying costs (subject to restrictions)022,000
Grant received040,000
                                                                                                        
Total relief (R&D and Grant)98,54962,000

 

You can see that, if the grant was Notified State Aid, it would significantly restrict the total relief available to the company. In this instance, the company would have been in a better position had it not taken the “free money”. This also restricts relief for future periods. Therefore, it is imperative to consider all your options before accepting cash in a form of a grant.

There are, however, a couple of things that you can do to avoid any potential pitfalls. By following the tips below it is possible to maximise your claim by combining both grants and R&D tax relief:

Know what type of grant your applying for – firstly, not all grants are classed as Notified State Aid and, as such, not all grants will land you in the less advantageous RDEC scheme. De-Minimis aid, which can distribute up to €200,000 worth of funding, is not classed as Notified State Aid and will therefore not force the project into the RDEC scheme. In this instance, it is possible to split relief over the two schemes: subsidised expenditure would fall under the RDEC scheme while the remaining unfunded expenditure will remain qualifying under the SME scheme, as seen in Option C below.

 

Option AOption BOption C
No Grant Received£40,000 Notified State Aid Received£40,000 De-Minimis Aid Received
Loss making
SMERDECSME/ RDEC
Qualifying Costs
Staff Costs250,000250,000250,000
Subcontractor costs (SME – restricted to 65%, RDEC Scheme – ineligible45,500045,500
Less: Grant received (ineligble under SME Scheme, instead eligible under the RDEC scheme)                             0                                                     0                                         -40,000
Qualifying costs under the SME scheme295,5000255,500
Qualifying costs under the RDEC scheme0250,00040,000
Tax Relief
SME scheme – tax credit worth 33.35% of qualifying costs98,549085,209
RDEC scheme – tax credit worth 8.8% of qualifying costs (subject to restrictions)022,0003,520
Grant received040,00040,000
                                                                                                                                                  
Total relief (R&D and Grant)98,54962,000128,729

 

Determine what project the grant relates to – the rules apply on a project by project basis, not on the total R&D work undertaken in the year. If you have received Notified State Aid in relation to one project, this does not affect your ability to claim under the SME scheme for any remaining projects. Likewise, if you have received Notified State Aid in relation to non-R&D activities, this will not affect your SME claim.

Look at the long-term implications – remember, once you have received Notified State Aid in relation to a project, that’s it: there is no way back. Try to consider the long-term implication of receiving the grant and how it will affect future claims. Taking a small £10,000 grant at the early stages of a R&D project may help cashflow in the short term, however this could also affect the ability to claim R&D tax relief in future years.

Speak to people who know R&D tax relief – I might be slightly biased here but R&D tax relief is an ever-changing, complex area of legislation and it really does pay to speak to an expert to ensure that you are maximising your claim, whilst also planning ahead to avoid any potential pitfalls.  A quick chat at the beginning of a project can provide you with a clear and proactive action plan, leaving you with more time to run your business!

If you have any queries about R&D tax relief, Notified State Aid or De-Minimis State Aid related to investment, contact David Philp today at entrepreneur@chiene.co.uk.