Earlier this year, the Government announced a wide-ranging consultation on the future of R&D tax reliefs, with an aim to reconsider the key objectives of the scheme, review the targeting of companies and highlight any concerns regarding mistaken or fraudulent claims.
As the Government aims to reach its spending target, significant increases will be required in both private and public investment, which contributes towards the Government’s plan to rebuild the economy after the impact of the pandemic.
While this is good news for SMEs, applications for R&D tax reliefs are also now coming under increasing scrutiny. HMRC have a wide range of enquiry powers to investigate suspected incorrect or fraudulent claims. They also have the right to probe into the validity of any claim, randomly or selectively, based on factors such as size of claim, risk profile or information gleaned from their investigation database.
It’s therefore important to get your R&D claim right first time, as mistakes can often lead to costly tax disputes and unnecessary tax penalties.
What tax relief is available for SMEs?
If you are an SME, in most cases you’d be making a claim through the SME R&D tax incentive, where the enhanced deductions against taxable profits can be claimed. The amount of the enhancement is currently 130%, however this amount is in addition to the actual expenditure, which is a total deduction of 230%.
If the R&D claim creates a tax loss, then you may be able to surrender the loss for a cash repayment, which could repay up to 33.35% of expenditure.
Where the company incurs qualifying R&D expenditure before it starts to trade, it can elect to treat 230% of that expenditure as a trading loss for that pre-trading period.
Qualifying R&D capital expenditure incurred by your company would be eligible for 100% research and development allowance.
A larger company, or certain SMEs who don’t qualify for the SME scheme, will be making a claim through Research and Development Expenditure Credit (RDEC), where different criteria may apply. For example, if an SME has benefited from a grant or subsidy, they may be limited to the RDEC.
Who is eligible?
R&D tax reliefs are available to all sectors. However, the company must be spending money on developing new products or processes, or enhancing existing ones, and the project must be innovative and address a specific area of scientific or technological uncertainty.
For example, a firm might develop improved financial algorithms, innovative coding solutions, or perhaps the creation and development of new medical treatments or new drugs.
The criterion also requires the following:
- For the claimant to be a limited company in the UK that pays corporation tax
- Must have spent money on these innovative projects
- Must be carrying out qualifying R&D activities
Once the above is met, only then will your company be entitled to a R&D tax credit claim to receive either an enhanced corporate tax reduction or cash payment.
You may also claim if you have increased deduction for R&D revenue spending and a payable R&D tax credit for companies not in profit.
How will R&D tax relief benefit your business?
You will have a chance to reclaim working capital, which gives your company an opportunity to reinvest back into the business. It’s a chance to reform your business and enable your firm to grow.
It’s important that the claim is right the first time, as mistakes can lead to costly tax disputes and unnecessary tax penalties. However, if the claim is correct, as mentioned above, a qualifying company can claim a deduction against its chargeable profits of up to 130% of the actual R&D expenditure. This is a total deduction of 230%, which also equates to a corporation tax reduction of around 44%.
Claiming your R&D tax relief
The rules surrounding the type of expenditures and projects that qualify for R&D can be complex to navigate, but Lubbock Fine have the skills, experience and resources to guide you through the process.
We can ensure that your company’s tax return reflects the full relief possible, and if necessary, seek pre-confirmation via HMRC’s Advance Clearance Service.
How can we help?
If you would like to discuss how we can help you to either make a claim for R&D tax relief, or make a disclosure to HMRC, please contact either Phil Blackburn, Tax Partner (firstname.lastname@example.org) or Graham Caddock, Tax Director (email@example.com). Alternatively, get in touch with your usual Lubbock Fine contact.