R&D Tax Reliefs – A Mechanism to Generate Cashflow as a Reward for Innovative Development
Problem vs Opportunity?
Given the challenges presented to companies during these unprecedented times, many businesses are taking advantage of the Government’s COVID-19 employment and loan schemes. Whilst these serve an invaluable role in supporting business, many companies are nevertheless facing a significant reduction in cashflow, which could be critical to the viability and health of the business. R&D Tax Reliefs present an ideal opportunity to boost a company’s cashflow. Whether you have never claimed under an R&D scheme or have been claiming for many years, the dedicated R&D team at MHA Moore and Smalley can help.
There has been uncertainty over the interaction of R&D and the Coronavirus Business Support Schemes from the perspective of state aid. Via our national association, MHA, we have been in contact with HMRC to clarify the position and are able to advise our clients on the best way forward.
New to R&D Tax Reliefs?
The UK R&D Tax Incentive Scheme will mark its 20th anniversary this year. The scope of activities that can qualify for the relief is often wider than realised and goes far beyond the preconception that R&D must have taken place in a laboratory setting. Across MHA, we have successfully dealt with claims ranging from Chocolatiers, to BitCoin Developers to Diesel Engine Mechanics. If your team have been pushing the boundaries of how-to problem solve within your industry, it is possible that they have been undertaking qualifying R&D:
A reasonable estimate of operational costs (such as staff salaries, payments to subcontractors, spend on prototypes and so on), is made by measuring the intensity of problem-solving activities in response to challenges within a project.
R&D relief for SME’s provides that 25p or 33p is realised for every £1 of qualifying expenditure, depending on whether the company was profitable or loss making (respectively) in the period. Larger Companies must claim under the R&D Expenditure Credit Scheme, whereby the benefit is roughly 10p for every £1 identified. Claims can be made up to 2 years after the end of the accounting period it relates to. The importance of the R&D Scheme is pronounced in the current climate, especially for loss making companies, where the losses can be surrendered for cash credit.
We have developed a highly agile claim preparation process, which follows best-practice guidelines established with HMRC, to ensure that in the current climate we can work remotely to efficiently and safely maximise the value of an R&D Tax Claim. The team have a 100% success rate with claims submitted, and can submit your claim within 3 weeks from starting the process.
Already Claiming R&D Tax Relief?
Claim processing time – Our MHA association has been in regular touch with HMRC during the lockdown, and the latest guidance indicated that HMRC has brought in additional resources to maintain their standard processing window in getting 95% of SME submissions through within 28 days.
Interaction of R&D Schemes with Coronavirus Business Support Funding – it is important to note that the SME R&D Tax Relief Scheme is denoted as State Aid. Furthermore, the recently introduced Employment Retention Scheme and Coronavirus Business Interruption Loan Scheme are also denoted as State Aid. Under EU rules, two forms of State Aid cannot subsidise the same piece of work. Consequently, if claims are being made under the Government’s COVID- 19 schemes, an R&D claim must be made under the less generous R&D Expenditure Credit (RDEC) Scheme.
It is important to remember that although the Coronavirus Business Support Funding may have been claimed only for a portion of the accounting period, if it did indeed subsidise a cost involved in an R&D project, then the entire project must be claimed under the RDEC Scheme. It may be possible to demonstrate that R&D activities had ceased for the duration of the lockdown (and hence when the govt support was claimed), however the facts would need to support this.
Another factor to consider is the definition of ‘de minimis’ aid, where the funding does not exceed more than EUR 200,000 over a 3-year period. The portion of the project subsidised through de minimis aid is claimed under the RDEC Scheme, whilst the remainder can be claimed under the more generous SME Scheme if applicable. Whatever the circumstances, it will be very important for companies to note which projects were live during the claim period and whether they interacted with any such funding. It has been confirmed that the VAT deferment Scheme should not affect R&D Tax Claims. The EU is currently looking into the suspension or modifications of conventional State Aid rules for Coronavirus Business Support Funding based schemes within member states, and our team is keeping a close eye on these developments.
Who remembers Budget 2020? – The Government had proposed three key changes that affected R&D Tax Claims as below:
- As a measure to prevent the abuse of the R&D Tax Relief Scheme, the Government had run a consultation with industry, where our colleagues at MHA MacIntyre Hudson provided feedback, on the introduction of a cap to cash credit payments for loss making claimant companies. This cap was proposed as being three times the total PAYE & NIC contributions made by the company in the claim period. The industry highlighted that whilst such as measure might prevent ‘shell’ companies from making claims, it would unfairly target start-ups, where directors do not reward themselves salaries. As a result, the Government have delayed the introduction of this cap to the cash credit to 1st April 2021, subject to further consultation with the industry on how to identify companies that have a genuine UK footprint in terms of development activities
- The RDEC credit rate was increased from 12% to 13%, resulting in an effective benefit rate increase from 9.7% to 10.5%
- Although the use of extensive data sets in testing and development within software projects continues to increase, there is no current mechanism within R&D Claims to qualify the costs of these. In response, the government is running a consultation on treating the costs of acquiring these data sets as a consumable item.
And last but not the least…
We predict that although the current lockdown has a stranglehold on the economy, many companies are looking to the future. Our role is to provide you with critical advice on how R&D projects could be structured to provide the maximum benefit both now and in the future.
To get in contact with our R&D Tax Specialists please email firstname.lastname@example.org and a member of the team will get in touch.
For information about other tax reliefs that are available for businesses and may help to increase cash flow, please read our factsheet here.
This article is based on a piece written by our colleagues at MHA MacIntyre Hudson.