Key things to remember when making an R&D claim
R&D tax credits are very valuable to companies. The good news is that this is something that the UK government is keen to invest in to encourage innovation to flourish in the UK. However, it is important to remember that it is not a give-away and that valid claims need to be prepared by companies, alongside their knowledgeable professional tax advisors.
We have outlined below some key points of learning based on our experience and recent court cases, for making an R&D claim.
| 1. | Claims must be made in a tax return to be valid. |
| 2. | The company must keep sufficient records to support any claims made and preserve those records until the sixth anniversary of the end of the respective accounting period. This includes invoices, payroll records, timesheets, bank records as well as any other record that the company has used to support the claim for tax credits. If the company is not vigilant about this and HM Revenue and Customs (HMRC) raises an enquiry, the claim may be denied if the company is unable to supply evidence of the R&D work undertaken and costs incurred. As a result, the company may have an additional corporation tax liability plus interest and maybe even penalties. This was the reality for a company in a recent court case. |
| 3. | The costs incorporated in a valid claim need to have actually been paid prior to the claim being made. In addition, following normal tax rules, salary costs need to have been paid within 9 months from the end of the period in question. If this proper diligence is not followed the costs are not allowed to be included within the R&D claim. |
| 4. | Whilst it is important to maximise the opportunity to benefit from the R&D tax credit schemes, do not take actions that would be fraudulent. If HMRC perceive or experience an abuse of the system, they may take steps to limit the benefit of the scheme or make the hurdles to qualify higher. HMRC has recently reported that it has identified and prevented fraudulent attempts to claim over £300 million in SME payable tax credits. As a result, there is a proposal to cap the benefit of the SME scheme for certain companies. |
| 5. | Certain overhead costs qualify as R&D qualifying expenditure but these are restricted. Heat and light costs are eligible, providing they directly relate to the qualifying R&D activity. Rent is not a qualifying cost regardless if it is incurred on a qualifying R&D project. However, the cost of acquiring a property as an R&D facility might qualify for relief in the year of acquisition (read our insight on Tax relief for capital expenditure on research facilities. |
| 6. | While owning IP is no longer a pre-requisite for making a claim for R&D tax credits, it is helpful to know this when working out whether your company can claim under the SME or RDEC schemes.
An SME that carries out and funds its own R&D projects and owns its IP can qualify for the SME scheme but if that company is subcontractor for someone else it does not own the IP so would not qualify for the more beneficial SME scheme. |
These points are examples of the sorts of issues that we, as specialist R&D advisors, regularly address with our clients. If you have any queries or want to chat about whether your R&D projects qualify please contact Stuart Weekes or Andrew Hawley.
