The government continues to believe that research and development (R&D) is an important part of its overall economic strategy, and as a result R&D tax relief has experienced significant growth in recent years.
However, as the latest HMRC R&D Tax Reliefs paper demonstrates, the spotlight on this valuable tax relief is becoming more and more prominent, with a perception of incorrect claims and fraud being significant.
It is therefore important that when an R&D claim is being made it meets with the requirements of the relief. Phil Hartley, tax director at Mitchell Charlesworth, has eight top tips for R&D tax relief for all companies to assist in this regard.
1. Use an appropriately qualified expert to assist with your claim
In recent years, accountants and tax advisors that are members of institutes have been required to follow specific guidance in relation to R&D claims. It is important that the advisors you are using follow these guidelines as this places emphasis on your advisor to ensure that the claim meets the requirements for the relief, therefore providing increased confidence over a claim. As members of the ICAEW and CIOT we are required to follow these guidelines and would be happy to assist with your claims.
2. Don’t think it’s just for white coats
There is a lot of misconception within businesses that this tax relief is only available to high tech businesses and ground-breaking scientific research. This is simply not the case. Companies across various sectors have and continue to make R&D tax claims.
3. Understand what qualifies
The guidelines that govern what does and doesn’t qualify for R&D tax relief are very general and do not provide specific industry examples. The basis for the claim is that an advance within the industry is attempting to be made and in achieving this position has overcome uncertainties that were not readily deducible. Without the overcoming of uncertainties there is not a valid R&D claim.
4. “This is what we do on a day-to-day basis”
When discussing R&D tax relief with clients many will state the above statement when talking about overcoming problems. Although this is the case, it won’t stop a company from claiming R&D tax relief and could form the basis for a claim, particularly where it is not readily known from the outset of the project if the position could be achieved.
5. Ensure you provide as much technical information as possible
With an R&D claim, the more information that you can provide to HMRC about the project, the better. To support the claim, HMRC require a technical report to be submitted demonstrating the company R&D activities. This isn’t for every project the company has undertaken in the year, but to provide sufficient evidence to support the costs being claimed. The more information provided on these projects, the greater the likelihood of HMRC accepting that the activities undertaken qualify for the relief.
6. Claim the right costs
What is clear from HMRC is what costs do and don’t qualify for R&D tax relief. A big no-no from HMRC is to claim a cost that doesn’t qualify for the relief, for example rent, which in turn can significantly delay the R&D process. It is therefore important to understand what can be claimed for and ensure that the costs claimed are maximised.
7. Don’t just claim for current work
The claim periods for R&D tax relief are based on the Corporation Tax accounting periods. Therefore, it is possible to submit amended previous tax returns for an R&D claim which hadn’t been considered earlier. For example, if your next year end was 31 March 2022, then initially you can look at the 2020 and 2021 year end, which could result in a tax refund.
8. Planning for future Corporation Tax rate changes with losses incurred from R&D claims
It isn’t uncommon that, for tax purposes, a loss is created from the R&D claim. In recent years the default position for most companies would have been to exchange the losses for the 14.5% cash credit, which would provide cash certainty over the position. However, with the increase in Corporation Tax rate being introduced from April 2023 to 25%, companies need to consider what would provide them with the overall best relief, either exchange now or benefit from reduced Corporation Tax liabilities in the future.
For advice and guidance on R&D tax relief and if it is applicable to your business, please contact Phil Hartley to the right of this page.