The definitive guide to R&D TAX CREDITS Sue Nelson The UK scheme for small companies in association with breakthrough funding

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1 The definitive guide to R&D TAX CREDITS Sue Nelson The UK scheme for small companies in association with breakthrough funding

2 CASH FOR INNOVATORS

3 Published in the UK by Breakthrough Publishing Breakthrough Publishing is a division of Breakthrough Funding Ltd The definitive guide to R&D tax credits Sue Nelson First published All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission of Breakthrough Funding Ltd. ISBN C CONTENTS Introduction The Babbage Test The scheme in a nutshell What you need to do to get the cash The technical report Itemising the costs Applying to HMRC - retrospective claims Applying to HMRC - in-year claims The detailed definition of R&D Science and technology Advance in science and technology Scientific or technological uncertainty Overall knowledge or capability Appreciable improvement System uncertainty Qualifying indirect activity Categories of qualifying expenditure Employee costs Staff providers Materials Utilities Subcontractors Capital expenditure Calculations for payable tax credits Tax benefit or surrendable loss Taking the cash if you re in profit Taking the cash if you re in losses The 90:10 trap HMRC statistics for the SME scheme Notes on grants General questions

4 INTRODUCTION R&D (Research and Development) tax credits are undoubtedly the single biggest funding mechanism for small businesses investing in innovative projects. These need to be self-funded, usually by using your own staff time or paying for external contractors to work on all or part of your project. Unfortunately R&D tax credits is a really poor description of the scheme. It s not simply a tax credit, although you can take it as future tax relief if you want. But many companies prefer to take it as actual cash instead. You can do this whether you re in profit or loss. So contrary to popular belief, it doesn t matter if you ve never paid corporation tax or have yet to make a profit, you can still get cash payments. It s pretty obvious then, that tax credit is a ludicrous description, because it means thousands of small companies believe they re not eligible as they re not making a profit or aren t really interested in taking a future credit. They re missing out even though the government wants to give this cash away. So we like to describe it more simply as cash for innovation. in association with breakthrough funding The deal is pretty simple; there s cash on offer for business owners who develop software, innovative 7

5 products or new processes. You ll find examples of successful claims at They show the type of projects that have received funding, but first you need to find out if your SME is eligible by taking the Babbage Test on the opposite page. We call it the Babbage Test because you don t want to be like Charles Babbage, the father of the computer. He did all that amazing development work on the first ever computer, only to run out of money in the final straight and see his invention gather dust in a back room. Perhaps even worse than that, you could see your innovation get launched without the right marketing budget to really make a splash, and so it just flops because nobody knows about it. It doesn t have to be like this. 16,160 small companies got an average 49,505 cash for innovation last year; money or tax benefit they were due from this government scheme. Why weren t you one of them? If you can tick all five boxes you need to see if you meet all the other criteria and how the process works. Keep reading... 8 THE BABBAGE TEST I have a limited company based in the UK I ve been trading for at least a year I employ less than 500 people My turnover is less than 85 million a year I m working on something new and different and I m pretty sure my competitors would steal it if they could 9

6 THE SCHEME IN A NUTSHELL The tax credit scheme rewards companies conducting self-funded R&D work and it doesn t matter whether they re in profit or in loss - it almost always ends up as a cash payment to the company if they prefer this to future tax relief. If you re pretty sure you re doing self-funded work, your innovative project needs to be an advance in overall knowledge or capability. Something that your competitors would like to get their hands on. Something that solves a problem in your industry. If you tried to find the product or software in question and ended up developing it yourself, because all the functionality or product benefits you wanted just couldn t be found that s likely to be an advance in overall knowledge or capability. You should be looking for a resolution of a scientific or technological uncertainty. In other words, you might have known that you could solve this particular problem eventually, but not how. If it failed at different points in the process and you had to try diverse ways to solve teething problems or design glitches, that s a good sign because it shows technological uncertainty. But it absolutely needs to be scientific and/or 10 11

7 technical, not aesthetic or cosmetic. Using a car analogy, you need to be designing something new or different underneath the bonnet, not just making the headlights look funkier. It s the back end not the front end, if you re a software developer. The scientific and technical classification also means that work in the arts, humanities and social sciences don t qualify. Neither does general market research or research for business planning. The costs you ve incurred have to be directly related to the innovation project and are described as R&D qualifying expenditure. In general you can claim around 25% of this expenditure back (the exact rate of payback is explained later). Usually these are salary payments to staff, or to subcontractors and companies you ve paid to work on the project. Costs to buy materials for prototypes can be counted too as can utility bills and software licences. If a company has commissioned you to do the innovation project you probably can t claim under this scheme, but you can use the large company scheme or the RDEC scheme instead. If it all sounds too good to be true, have a look at the detail on the government website and also check the HMRC statistics shown later in this book.

8 SUCCESSFUL R&D CLAIM: How is it possible to be the first to hear that Lady GaGa is on tour? A data mining software development project at a scale that will blow your mind involved significant appreciable improvement. WHAT YOU NEED TO DO TO GET THE CASH THE TECHNICAL REPORT You need to prove to HMRC that your technical innovation meets the current legislation and the DBIS guidelines. All the details of the conditions that need to be met can be found on the.gov website. The guidelines are for the purposes of Section 837A Income and Corporation Taxes Act In this context Research and Development is defined for tax purposes in ICTA88/S837A and given legal force in Parliamentary Regulations. In order to make a claim you need to write a technical report explaining the innovations you ve been working on, the people involved and how this meets the legislation. If you just submit the costs in a spreadsheet or skip over the technical details of the project, you re unlikely to be successful. 14 HMRC estimates that 50% of all companies who submit their own R&D claim are refused a payment because they don t explain how their project is legally defined as research and development. Whereas close to 100% of claims submitted by R&D experts (like Breakthrough Funding obviously!) are paid out. 15

9 ITEMISING THE COSTS When the technical report has been completed, all the costs associated with it (the R&D qualifying expenditure) need to be itemised. Typically these include: The salaries of the PAYE employees involved, and a percentage of the time they spent on development and testing work (dividend payments are ineligible). Subcontractor costs (it doesn t matter whether the subcontractors are based in the UK or not, as long as you ve paid them through your UK Limited company). The costs of materials used for prototyping or testing (although there are special rules in relation to prototype costs). Your utility costs (heat, light and power but not telecoms, rent or rates) SUCCESSFUL R&D CLAIM: How can you communicate between organisers, security personnel and emergency services in the middle of a muddy field? A crowd control system, which allows realtime, preemptive responses by organisers without the use of wi fi or 3G/4G networks overcame considerable technical uncertainty. APPLYING TO HMRC: RETROSPECTIVE CLAIMS The R&D tax credit scheme is administered through the Corporation Tax system. So while you may not have paid corporation tax for a particular year, or you re still pre-profit, you need to fill out the details in a corporation tax return (CT600) to get the tax relief or cash you re due. You can go back two years to amend your corporation tax return. That s two of your company s financial years, not the HMRC tax year. We call these 16

10 retrospective claims. So, if your company year-end is 31 October and you re making an R&D claim on 1 September 2015, you can go back two previous years; 1 November 2012 to 31 October 2013 and 1 November 2013 to 31 October As soon as you get to 1 November 2015 however, you lose the ability to go back and claim for your 2012 to 2013 year. All that cash you could ve claimed will be lost. Timing is everything. In this example, on 1 September 2015 you would be able to claim tax relief or cash for 2012/13 and 2013/14, by re-submitting an amended corporation tax return (CT600) with the total R&D costs you ve calculated. To this you would attach the technical report and the itemised costs proving you ve met the R&D conditions. In essence you re showing you underestimated the costs for those two financial years (you didn t realise you could add in R&D costs). So you re showing that your previous tax position was incorrect. This doesn t affect the content of your previous accounts. These remain untouched. It just affects your tax position and what you put in your revised corporation tax return. This means that if you were in profit you paid too much corporation tax and are now due a corporation tax refund. If you were making losses, you could surrender these as a cash payment. In both cases instead of taking cash you could opt for the future tax relief going forward. APPLYING TO HMRC: IN-YEAR CLAIMS If you ve finished your year-end and not yet submitted your corporation tax return, the technical report and itemised qualifying expenditure needs to go in that return and be considered when paying your corporation tax bill. We describe this as your in-year claim, as you re still inside the time limit for paying and submitting your corporation tax return. (You usually have to pay your corporation tax on or before 9 months and 1 day after your company s financial year end). If you re in profit and making an in-year claim, then you re not going through the process of amending your corporation tax return, you re submitting it for the first time for that year. Therefore putting your R&D qualifying expenditure into your return is unlikely to result in a cash payment because you will not be getting a refund of overpaid corporation tax. You will be reducing the amount of corporation tax you pay instead. However, if you re in losses and submit an in-year claim, you could still opt for a cash payment. Submitting an R&D claim is something you can do each year. It doesn t have a time limit as long as your self-funded work continues to satisfy the legal definition of R&D

11 HMRC currently have five R&D tax offices that scrutinise all R&D claims. If they re happy with your technical submission and the associated costs, they ll usually process the claim within 28 to 40 working days. 21

12 THE DETAILED DEFINITION OF R&D SCIENCE AND TECHNOLOGY Advances in representing the nature and behaviour of the physical and material universe are accepted as science. Well that s pretty broad! Work in the arts, humanities and social sciences, including economics, is not science as applied to R&D tax credit definitions. Technology is the practical application of scientific principles and knowledge, where scientific is based on the definition of science above. To convert this HMRC-speak into plain English, example activities that directly contribute to R&D include creating or adapting software, materials or equipment as well as planning, engineering or product design, testing and analysis. Many other activities carried out in-house by thousands of small companies can be eligible. Check the case studies to get a feel. The scheme doesn t just apply to organisations that employ mad professors or lone inventors. Activities that don t apply include cosmetic and aesthetic enhancements to products, marketing, costs relating to patent applications, accreditation licences or the production and distribution of goods/services once the R&D work has been completed. 22

13 SUCCESSFUL R&D CLAIM: How can so many injuries be prevented while maintaining or fixing concrete mixers? The solution used advanced laser cutting machinery and new techniques for a mixer entry system which demonstrated a clear advance in technology. ADVANCE IN SCIENCE OR TECHNOLOGY R&D needs to be an advance in science or technology that increases the overall knowledge or capability of the sector. Would your nearest rival be jealous of your solution, or want to steal it? It s likely to involve competent professionals, i.e. not a handful of interns or low level admin assistants working on the project but people who would be considered knowledgeable or experienced in their field. The advance might have intangible outcomes in the sector, such as giving you a distinct cost advantage or making your processes quicker or more efficient. Or it could have tangible consequences such as a new product, type of design, software functionality etc. It s ok to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way. For example, take a product that has exactly the same performance characteristics as existing models, but is built in a fundamentally different manner. SCIENTIFIC OR TECHNOLOGICAL UNCERTAINTY The solution to the problem shouldn t have been solved easily or without much effort, so at the beginning you may have known it could be solved, but not how. Scientific or technological uncertainty exists when the solution is not readily available or deducible 25

14 by a competent professional working in the field. The definition allows companies to claim for developments where they ve turned something that s already been established as scientifically feasible, into a costeffective, reliable and reproducible process, material, device, product or service. Note that improvements, optimisations and fine-tuning which don t materially affect the underlying science or technology don t count. OVERALL KNOWLEDGE OR CAPABILITY Overall knowledge or capability means the solution is recognised by other experts (or even informed members of the public) as being an advance. Note that the innovation doesn t have to be unique. If your development has already been made or attempted by a rival company, but the details are not readily available in the public domain and you ve had to go through the whole development process yourself, that s allowable. However, the routine analysis, copying or adaptation of an existing product, process, service or material, will not add to the overall knowledge nor will it be an advance in science or technology. APPRECIABLE IMPROVEMENT Appreciable improvement means to change or adapt the scientific or technological characteristics of something to the point where it s better than the 26 original. The improvement should be more than a minor or routine upgrading, or just the next iteration of previous R&D. It should be quite an overhaul. Improvements arising from the adaptation of knowledge or capability from another field can be considered appreciable improvements, but it must involve a sector level advance and some uncertainty. Improvements that arise from taking existing science or technology and deploying it in a new context (for example a different trade or sector) with only minor or routine changes are not considered appreciable improvements. SYSTEM UNCERTAINTY System uncertainty is scientific or technological uncertainty that results from the complexity of a system rather than uncertainty about how its individual components behave. For example, in proprietary software, the characteristics of individual components or functions are fixed and known, but there can still be uncertainty about the best way to combine those components to achieve a different overall effect or completely new functionality. However, assembling a number of components (or software sub-programs) to an established pattern, or following routine methods for doing so, is not going to cut it. 27

15 QUALIFYING INDIRECT ACTIVITY These are activities that form part of a project but do not directly contribute to the resolution of the scientific or technological uncertainty. In an R&D claim the following costs can be included as long as they are clearly identified as such. They are: Wider scientific and technical research that contributes to, or informs, the project. Indirect supporting activities such as maintenance, administration, clerical activities, finance and personnel activities, as long as these were undertaken to support, inform or contribute to the project. Ancillary activities essential to the undertaking of R&D (for example leasing laboratories specifically for the development activity and maintaining R&D equipment. This could include the maintenance cost of computers used for R&D purposes). Training of personnel or subcontractors required to directly support an R&D project. Research by students and researchers carried out at universities. Research (including related data collection) to devise new scientific or technological testing, survey, or sampling methods, where this research is not R&D in its own right but definitely contributes to the project overall. Feasibility studies to inform the strategic direction or specification of a specific R&D activity. 29

16 CATEGORIES OF QUALIFYING EXPENDITURE As a rule of thumb you can claim R&D tax relief on revenue expenditure (generally costs incurred in the day-to-day running of the business), but not capital expenditure (on assets such as computers or buildings). If you ve spent money on allowable qualifying expenditure but these were only partly used on the R&D activity, you can claim for an appropriate proportion of that cost. EMPLOYEE COSTS You can include the salary costs of employees who were both directly engaged in the R&D activity itself, and were indirectly involved. See the section on qualifying indirect activity on page 29 to understand the definition. SUCCESSFUL R&D CLAIM: How can you track and control emergency service workers under highly demanding conditions? This company overcame system uncertainty to combine known components to deliver an innovative monitoring system in a new way. The staff must be employed under a contract of employment directly with your company, which means that consultants, agency workers, or staff/directors whose contracts of employment are with other companies are excluded in this category. Note that you can count a proportion of an employee s salary, depending on the level of the involvement with the project. For example, if someone works one day a week 30 31

17 for a year you could claim 20% of their salary costs. STAFF PROVIDERS If you ve used an agency to provide someone to carry out R&D work, this may be allowable but note that the cost of recruitment isn t. But the staff provider needs to contract with the individual whose services they supply, it can t be through another person. The definition of externally provided workers is based on the income tax rules for agency workers at Section 44 Income Tax (Earnings and Pensions) Act If the agency has a contract with you which is for more than the provision of workers it amounts to subcontracting (see page 34). SUCCESSFUL R&D CLAIM: How can you manufacture vegan cosmetics that are also halal-certified and free of artificial colours without comprising quality, texture and product stability? The solution used many consumable materials in trials and testing which were an allowable cost in the R&D claim. MATERIALS HMRC define these as consumable or transformable materials used directly in carrying out R&D. These are actual physical materials that are consumed in the R&D process, and not things like software costs, although software licences specifically bought for R&D purposes can be claimed. The key point is that the expenditure must be on items that are used during R&D activity but are no longer useable in their original form afterwards, because they re finished up or transformed into something completely new or different. 33

18 For example an electronic item integrated and used to build a prototype, but which afterwards has no use and is not sold on, can be claimed as a material cost. UTILITIES You can approportion some of your power, water and fuel costs if they can be attributed to overall R&D activity. Telecoms, data costs, servers, rents and rates are not eligible qualifying costs though. SUBCONTRACTORS If subcontractors are used to carry out R&D work it doesn t matter if they re not UK based, as long as it s evident that your UK company has paid for the work. However, unlike all other qualifying costs subcontractor 34 fees can only be counted as 65% of their invoice value. If the subcontractor is connected to your company (via another group company, a settlement, trust or as your spouse or civil partner), special rules apply. This may be the situation if a group company cross charges for development work, or a shareholder is invoicing for R&D activity carried out through their own company. CAPITAL EXPENDITURE Capital expenditure is not an allowable cost for R&D tax credits, however money spent on capital assets could be claimed back through the separate R&D capital allowances scheme. Note that if your R&D costs have been capitalised these could still be eligible. 35

19 CALCULATIONS FOR PAYABLE TAX CREDITS When you write a technical report and calculate all the costs as being eligible for an R&D claim, this is your R&D qualifying expenditure. This is NOT the benefit or cash you get back, it is the figure used to calculate your tax relief or cash payment. As an example your qualifying expenditure may be 150,000 but your tax benefit could be 37,500 (i.e. 25%). TAX BENEFIT OR SURRENDABLE LOSS (GIVING RISE TO A PAYABLE TAX CREDIT) If you re a profitable SME, then before 31 March 2015, the tax relief on allowable R&D costs is 225% - that is, for each 100 of qualifying expenditure, your company could have the income on which Corporation Tax is paid reduced by an additional 125 on top of the 100 spent. From 1 April 2015, the tax relief on allowable R&D costs is 230% - that is, for each 100 of qualifying expenditure, your company could have the income on which Corporation Tax is paid reduced by an additional 130 on top of the 100 spent. Put simply, the amount of tax benefit or payable tax credit (cash) as a percentage of R&D qualifying expenditure, ranges between 25% and 26% if you re in profit. Note this is subject to the 90:10 rule below. 36

20 If you re a loss-making SME, then the tax benefit to carry the loss forward and offset against future profits is as above i.e. the amount of credit as a percentage of R&D qualifying expenditure ranges between 25% and 26% depending on dates. But, if you want to take a cash payment (elect to surrender your R&D enhanced loss in return for cash), then the calculation is different. In this situation the amount of credit as a percentage of R&D qualifying expenditure ranges from 33.35% (for costs from 1 April 2015), 32.63% (for costs between 1 April 2014 and 31 March 2015) and 24.75% (for costs before 31 March 2014). Put simply, the amount of tax benefit as a percentage of R&D qualifying expenditure, ranges between 25% and 26%. But the amount of payable tax credit (cash) as a percentage of R&D qualifying expenditure, ranges between 24.75% and 33.35% if you re loss making. Note this is subject to the 90:10 rule below. 38 TAKING THE CASH IF YOU RE IN PROFIT Put another way, if you re in profit and have paid corporation tax, you may be due a full tax refund on the tax benefit. However, to get the full 25% to 26% refund in cash, the tax benefit will need to be smaller than your corporation tax payment for that year. For example if you have 150,000 qualifying expenditure and your tax benefit is calculated at 37,500 and you paid 40,000 corporation tax for that year, you could 39

21 get the full 37,500 back as a cash refund. TAKING THE CASH IF YOU RE IN LOSSES If you re in losses and have paid no corporation tax, you may be due a full cash payment on the tax benefit. In losses your cash payment could be 24.75% to 33.35%, but to get this full amount the qualifying expenditure will need to be smaller than your losses. For example if your qualifying expenditure is calculated at 150,000 and you ve made a 180,000 loss for that year, you should get 37,125 to 50,025 as a cash payment. THE 90:10 TRAP We call this the 90:10 trap because although we don t know the exact number of SMEs this applies to across the country, this only happens to less than 1 in 10 of our clients. It s a ridiculous anomaly in our opinion. Essentially if you re at break-even point you re at a disadvantage. You could still get the full 25% to 26% future tax relief if you choose this option, but the level of cash refund or cash payment will only be between 13.75% and 21.75% and not 25% to 33.35%. You ll be in this situation if: You ve made a small profit and paid corporation tax on it, but your R&D tax benefit is higher than the corporation tax you have paid. You ve made a small loss but your R&D qualifying expenditure is more than your loss

22 SUCCESSFUL R&D CLAIM: 135 countries suffer from inconsistent, complicated or inadequate addressing systems. It means that 4 billion people are invisible. How can you find remote locations with water facilities that need monitoring or fixing when they re unaddressed? This claim involved the development of the simplest, most memorable, multi lingual, offline system that can accurately identify a 3metre x 3metre location, anywhere on the planet. At the outset there was huge uncertainty whether the system could be designed or brought to market, but they did it!

23 HMRC STATISTICS FOR THE SME SCHEME The latest HMRC statistics for the R&D tax credit scheme were released on 11 September These show the latest figures up to the tax year 2013/2014. The main points show: Since the R&D tax credit scheme was launched in 2000/2001 around 34,000 SMEs have made successful claims. The scheme is at last gathering pace among SMEs. In the last year 16,160 have made successful claims, up 23% from last year. However, it s estimated 90% of those eligible are still not claiming. 65% who claimed last year received a deduction from corporation tax liability (this could be tax relief or a tax refund), 17% received a payable credit (cash because they were in a loss) and 18% received a combination of the two. In total, 800 million was paid or credited to SMEs; an average benefit of just under 50,000 to each company. The average SME R&D expenditure was 209,000, or an average benefit of around 24% of the qualifying expenditure. London and the South East accounted for just over half of all SME claims. 44 SUCCESSFUL R&D CLAIM: Flood management has become a real issue in the UK in recent years. But how can you reduce the increased millions in pumping costs due to the extra diesel and electricity used? This claim involved a pumping system completely new to the sector which uses only water power, has minimal moving parts, zero energy requirements, zero running costs and zero maintenance. Undoubtedly an advance in technology.

24 SUCCESSFUL R&D CLAIM: IT support by its nature is reactive. But how do you deliver a service to either spot issues in real time or predict them before they happen? This entirely new tracking and management system has taken elements from other sectors and redefined and designed them for their own sector. NOTES ON GRANTS If you ve already received a grant, you may still be able to claim R&D tax credits. Companies can claim R&D tax credits under the SME scheme when: They ve received any amount of state aid, but only for self-funded qualifying expenditure, not for qualifying expenditure that is being covered by the grant. They ve received notified state aid (e.g. Innovate UK grant) less than 200,000 in a 3 year period and the grant is less than half the total project costs (de Minimis Aid). But only for self-funded qualifying expenditure, not for qualifying expenditure that is being covered by the grant. Companies cannot claim R&D tax credits under the SME scheme when: They ve received state aid or notified state aid (e.g. Innovate UK grant) over 200,000 in a 3 year period. However, they may claim under the Large Company or RDEC scheme including qualifying R&D costs that have been funded by the grant. Note that you can t even pay back state aid in order to claim SME R&D tax credits instead. Sorry too late. SOME DEFINITIONS: State aid is usually funded programmes from the EU. 47

25 Examples include Horizon 2020 and the Framework programme. Notified state aid tends to be UK funded/run programmes that are agreed (or notified ) to be state aid by the EU. Examples include government Smart Grants, ERDF funding, Innovate UK (TSB) grants. De Minimus Notified state aid is defined as UK funded/run programmes that are agreed (or notified ) to be state aid by the EU but are less than 200,000 in a 3 year period and the grant is less than half the total project costs. Examples include government Smart Grants, ERDF funding, Innovate UK (TSB) grants. To find out if your grant is state aid : Contact the scheme/grant provider and ask for a definition of the grant. They will know. Call DBIS State Aid Team on they may be able to help

26 GENERAL QUESTIONS be vaguely aware of it, they probably don t realise it applies to you. What are R&D tax credits? A government incentive scheme to encourage companies to carry out self-funded development projects. It s the government s way of trying to make the UK more competitive and innovative in world markets. It allows companies to claim for a proportion of the costs they ve already incurred in developing new products, services or processes. Is it a new thing? Not really. The scheme started in 2000, and since then more and more small companies are realising they can claim. However, it s thought that 90% of eligible companies are still not getting their cash. Is it a tax avoidance scheme? Certainly not. The Department for Business, Innovation and Skills (DBIS), HMRC and The Treasury fully support the scheme and WANT COMPANIES TO CLAIM. Why hasn t my accountant claimed for me before? There s a belief that this scheme is for companies who employ staff in white coats peering down microscopes or trying to develop a cure for ebola. This is just not true. To be fair, the government hasn t promoted the scheme as they might, so while your accountant may Who can claim? This book only deals with the small company scheme. This is for limited companies based in the UK with less than 500 employees and less than 100 million (roughly 85 million) turnover a year. Most of us then! Does it really result in cash back? The quick answer is yes. If you meet the criteria and are making a profit you can get a refund of corporation tax that you ve already paid. If you re making a loss you can get a cash payment paid into your business account. However, sometimes companies prefer not to take the cash and take the future tax relief instead. How much money can I expect to get back? This is difficult to answer because it depends on your tax position. If the R&D costs qualify, you should expect between 13.75% and 33.35% of those costs back. The tax benefit (as opposed to taking the cash) is almost always between 25% and 26%. HMRC say the average is 24% of qualifying costs. How long does it take to get the money? 75% of claims received by are settled by HMRC within 28 working days of an R&D claim being submitted. If there s a query this can extend to three months

27 What types of projects are eligible? Any project that s involved substantial innovation should be eligible. It must be scientific and technical and not just an aesthetic or cosmetic enhancement. My project failed. Does that matter? No. The costs involved in the development activity you ve undertaken are taken into consideration, not the outcome of the project itself. Success or failure (i.e. if it didn t actually see the light of day and get launched or used) generally doesn t matter. Can I claim for website or app development? It depends. If you ve just designed a new website for your company and got it online, that s not an innovation. However, if there s whizzy back-end stuff on the site that does something a bit different, then that element of work can be claimed. The same applies to app development. Not usually. However, if it s an integral part of getting a new product through to market it may be eligible. Can I claim for developing training packages? The short answer is no. But if you re attempting to deliver the training package in a new and different way, this element could be part of a claim. Can I claim every year in my corporation tax return? Yes. There s no limit to the number of annual claims, as long as you can continue to demonstrate that the R&D project work meets the criteria. What costs can I claim back? Essentially it s salaries, prototype materials and subcontractor costs, but they must be directly related to the innovation project. Capital costs such as equipment, machinery etc cannot usually be claimed for this scheme but can be claimed in other ways. Can I claim for fashion design, graphic design or new branding projects? Not usually. If you ve made something look different or developed a new brand, this doesn t qualify for the scheme. But if you ve used new materials in a way that hasn t been done before, this could. Can I claim for market research and business case development? We re a charity. Can I get cash for innovation? If you re not eligible for corporation tax you can t claim under this scheme. But many charities have trading companies where innovation work takes place and you can claim under that company. We re an LLP. Can I get cash for innovation? An LLP structure is normally exempt from this scheme. But some LLPs have a separate limited company where 52 53

28 innovation work takes place and this could make them eligible. I haven t made a profit. Can I still claim? Yes, you can still get a cash payment if you re making a loss, as long as you meet the other criteria. I m a start-up business. Can I still claim? You can only submit a claim once you ve completed one full financial year. This doesn t mean you can t apply later on - it just means you need to wait a bit. Can I claim for server costs? We get asked this a lot, and in our opinion, no. Can I claim for my utility bills? Yes, you can claim a proportion of light, heat and power in relation to the innovation costs, but not for rent and rates. No, you can only claim back for PAYE staff salary costs not dividend payments. I have used subcontractors from overseas. Can I still claim those costs? Usually yes, as long as you are eligible for UK corporation tax and they have sent you an invoice for their work. How far can I go back to claim? You can go back two full financial years. That s your company financial year, not the HMRC tax year. Can I get my accountant to claim for me? Yes of course. Just make sure they have experience of submitting these claims and can write up the technical report that explains the innovation work in detail. This is the critical bit and needs to be attached to the re-submitted/submitted corporation tax return. I have other grants and funding for my R&D. Can I still apply? It depends. You need to look at the nature of the grants you ve received. If they re state aid certain elements may not be claimed, or it can make your whole project entirely ineligible for R&D tax credits. We pay dividends instead of a salary. Can I claim for those payments? What happens if HMRC want more information? Sometimes an HMRC Tax Inspector has a query about an R&D claim that s been submitted. Usually they want to understand the innovation in more detail or have a query about some of the costs you ve outlined. This is perfectly normal and we ve always found them to be helpful and polite, however you will need to answer their questions fully or you cannot expect them to pay out against your claim

29 What if I have more than 500 employees or a turnover of more than 100 million (about 85 million) a year? If your innovation projects qualify you can still apply for a cash payment or the tax benefit under the Large Company scheme or the Research and Development Expenditure Credit scheme. It s just not as generous as the small company scheme. My company is no longer a going concern does that matter? Yes it does. A company may only claim at a time when it is a going concern. Why haven t I heard of R&D tax credits and can I really get an average 50,000 back in cash? The scheme hasn t been promoted as well as it might. It s like the UK s best kept business secret. And, yes you really can get significant sums back. 16,610 companies did just that last year

30 Disclaimer While every attempt has been made to ensure the accuracy of information in this book, Breakthrough Funding Ltd and Sue Nelson do not accept responsibility for omissions or errors, nor for the results that use of this information provides. We do our best to ensure the information provided is up to date and accurate. However, since much of the information involves changes or updates to UK legislation and periodic HMRC guidance, we cannot guarantee this. We absolutely cannot guarantee that it is suitable for your particular purposes, as inevitably, the information has to be general in nature, rather than specific. In particular the information and calculations in this book are provided as a guide and not a guarantee of the value of your R&D tax credit expenditure or claim, as this is dependent on your individual circumstances and company tax status. The provision of information here is made with the express understanding that Breakthrough Funding Ltd and Sue Nelson are not engaged in any way to give tax, accounting or any other advice on professional services or business matters. As such, the information should not be used as a substitute for individual consultation with a qualified accountant or specialist R&D tax consultant, or thorough examination of your company tax status

31 The definitive guide to R&D TAX CREDITS The UK scheme for small companies Research and Development Tax Credits are undoubtedly the single biggest funding mechanism for small businesses. On average they can get back just short of 50,000 in cash or as future tax relief, and they don t have to give away equity or pay for a loan. It s the UK s best kept business secret. Nelson and her team have completed hundreds of successful claims for small businesses with a 100% success rate. Here she explains how the scheme works and what you need to do to claim this money for your company. Further information can be found at RRP

www.pwc.co.uk R&D tax relief May 2012

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