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 COVID-19 reliefs impact Research & Development Tax claims

The Chiene + Tait team has been inundated with queries regarding the various new COVID-19 reliefs that are available for businesses. Whilst cash has always been ‘king’ for businesses, there has never been a more important time to have sufficient reserves.

Research & Development (R&D) Tax Relief has been the ‘go-to’ cash relief for innovative companies since 2002. There are complexities as to how R&D Tax is interlinked with the new COVID-19 reliefs, which should be considered before diving into making claims for the various reliefs available. Below are a few frequently asked questions we have received from clients in relation to the reliefs:

Should I claim under the Coronavirus Business Interruption Loan Scheme (CBILS)?

Yes, but watch out for traps. EU regulations require that no project, as opposed to no company, can receive more than one notified State Aid. As the SME R&D Tax scheme and the CBILS have both been notified as State Aids, there could be an issue regarding allocation of costs, particularly if the CBILS relates specifically to R&D expenditure, rather than being used more generally to support the company as it is intended. It is vital to watch out for this when drafting CBILS applications. If it is not an option split out the costs, all isn’t lost. An R&D claim would still be able to be made under the RDEC scheme, albeit at a lower level of relief.

Should I use a COVID-specific grant to fund my R&D project?

Since the start of the pandemic, we have seen a significant increase in the number of grants available for R&D projects. In some instances, these grants are deemed to be notified State Aid, meaning that the full R&D project would be ineligible under the SME scheme. A claim can, thereafter, only be made under the less-beneficial RDEC scheme. It is worth noting that, once a project is ineligible for the SME scheme, that’s it. The project would continue to be ineligible for the entire length of the project. It’s therefore important not to just think about the cash benefit this year, but also years 2 and 3.

Where a grant isn’t notified, it will likely be de minimis. Receiving de-minimis aid will still impact your R&D claim but not to the same extent as if you received notified State Aid. All costs subsidised would be ineligible under the SME scheme, however, an SME claim can still be made for the costs not covered by the grant. This essentially means that 2 claims can be made, one under the SME scheme for the non-subsidised costs, while a RDEC claim can be made for the subsidised costs.

It’s not always obvious how a grant should be treated, and it is an area where the devil is very much in the detail. Make sure that you seek advice so that you don’t accidently limit the cash relief available.

What happens if I furlough staff?

When an employee is furloughed, they will not be carrying out any work; therefore, they will not be directly and actively engaged in R&D activities. This will likely impact next year’s claim rather than any immediate claim for obvious reasons, however, it is something to consider. This will not affect your ability to claim eligible projects, once the employee has returned, the R&D project can re-start.

During the pandemic, it is vital that you claim for all relief that you are eligible for. If you have a query about what your business can claim contact our team today at covid@chiene.co.uk.

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.