Guide to R&D Tax Credits

Terry Toms CEO of www.randdtax.co.uk will from September
this year be offering clients of Capital Enterprise members an opportunity to
attend a series of workshops on how to claim Research & Development Tax Credits.
Below Terry answers the “Frequently Asked Questions” (FAQ’s) on this much under
used benefit.

What are R&D Tax Credits?

The R&D Tax Credits scheme was designed by the then DTI ( now Department of Business, Innovation & Skills) to provide a Corporation Tax incentives to companies using science or technology to create innovative products, services or processes.  The current rate as it applies to SMEs enables companies to treat qualifying R&D expenditure at 200% of its value for the purpose of calculating their Corporation Tax.  For large companies the current rate is 130% so the big purpose is to encourage SMEs to innovate.  For companies not paying tax they can surrender future losses and receive the R&D tax credit in the form of a cash payment – or they can carry forward the loss to be offset against futureprofits.  The minimum annual qualifying R&D spend must be in excess of £10,000 and claims must be made within two years of the financial year end to which they relate.  Where the credit is received as a cash payment the claim is limited to the amount of total PAYE/NI due by the company for the qualifying period – this rule may change soon.

At present you must have be paying payroll taxes ( PAYE and NI) in
excess of £10,000 per annum- a good reason why even start-ups should be paying themselves a salary rather than use off-balance sheet finance (i.e, credit cards and
personal loans) to fund the directors own living expenses. Surprisingly, where
R&D has been capitalised more than two years ago, then written of to the
P&L account some time later the costs can qualify in the year they are
written off.

What Costs Qualify?

The most important and largest qualifying costs are labour costs for R&D work,
and those could be directly employed labour or work subcontracted to external
organisations in the UK or overseas.  All qualifying labour costs
can be claimed and 65% of subcontracted R&D labour costs.  Other costs are described as “consumables directly related the R&D work”.  This could include recruitment, training, software licences and development hardware costs and other costs that are directly attributable to the R&D work.  On all sides the costs related to R&D
project management, system architecture and testing of prototypes should be included.

For tax credit purposes what does HMRC mean by the term “Research & Development” ?

This is the big question and will be covered at the Workshop.  There is access to all the qualification guidelines from the HMRC web site- If you have time to read it all and follow all the links you will see it is a great piece of work.  If not, and you want to discuss a case, please give me a call.  What it boils down to is that the justification should show in what way your projects represent scientific or technological advancement, what were the scientific or technological uncertainties to be resolved, how and when they were resolved, a description of the technical content of projects and in what way your people
were qualified to do the R&D.

Why have many companies with potentially valid claims either not claimed at all, or not claimed enough?

There are many reasons for this.  They range from companies thinking it is too complex and time consuming to assess qualifying work and make a claim; to misunderstanding the scope of qualifyingconditions; or having tax accountants who do not fully understand what does anddoes not qualify; or they just do not know about the R&D tax credit scheme.  Some companies have made claims which have been questioned in the past on justification grounds by HMRC and they subsequently decided it was too much hassle. 
I work with the accountants who handle the financial side of the claim
and many admit to having little or no understanding of the technical qualification
aspects of the R & D, and some simply avoid being involved.  If the view taken is too narrow, the company may be under claiming.

In money terms what has been the
impact of R&D Tax Credits for UK Business?

The last figure I read (2009) was in excess of £3b since R&D Tax Credits were introduced
in 2000 for SMEs, 2001 for the large company scheme.  For the 90 companies where I have handled the justifications relating to in excess of 300 projects, I estimate they have
benefitted by in excess of £4m.  With the last four claims completed, each covering two financial years, the average claim was £43,000.  However, a recent
survey by one of the UK’s leading accountancy practices estimated that around 50% of SMEs entitled to apply for R&D Tax Credits had not done so.

Are R& D Tax Credits under threat from the new coalition government?

The Conservatives originally announced that they would scrap R&D Tax Credits.  However, a few weeks before the election, and following their Dyson Review on Innovation, they announced that they will not scrap the scheme.  In a starting move since coming to power the coalition government announce an increase in the
R&D Tax Credit rate to 200% in April 2011 and pre announced that it will go
up again in April 2012.  Great news for innovative SMEs.

What do I do, and what do I not do?

My role is to investigate the scope of a client’s R&D work, make sure they
understand the scope, review the technical aspects of qualifying projects and
produce a draft justification for submission with the Corporation Tax claim.  I do not take over the role of the accountant who is the Corporation Tax specialist, but will help in any way I can including dealing with any questions from HMRC in relation to R&D qualification.  I ran an ICT company and sit on the R&D Committee at Intellect (formerly CSSA and FEI), the trade body for the ICT industry.  This committee worked with HMRC to ensure that they understood the R&D aspects of ICT development work – and worked to help the industry understand the HMRC Guidelines and Guidance.  Although, 80% of my justification work has involved ICT companies, clients have been involved in other areas such as innovation in electronics, packaging, surgical gloves and environmental
science.  I have now produced justifications for more than 90 companies, covering in excess of 300 projects.  In some cases I have been asked to help when
a company has made a claim which is meeting with resistance from HMRC.  While it is better if I can produce the justification document to be submitted with the claim, I have been able to help in those tricky situations.

Terry Toms – FellowIIB

07957 143432

www.randdtax.co.uk