10 insider tips and tricks for your R&D Tax Credits claim
1. Know your schemes: SME or RDEC
First thing first, you need to check which scheme you qualify under. When claiming R&D Tax Credits, there are two schemes you fit into: the SME scheme or the RDEC (large company) scheme.
Small companies are companies that meet the following criteria:
Fewer than 500 employees
turnover less than €100 million
balance sheet less than €86 million
If you don’t meet the criteria for a small company then you will automatically fall under the RDEC initiative. All other companies will fall under the RDEC initiative.
Both schemes have similar categories of qualifying expenditure, but the SME scheme is typically more lucrative than RDEC due to how the calculations differ, so it’s wise to brush up on navigating the RDEC scheme if you have a large company. This is crucial if you have received a grant for a project as this could affect whether you can claim under the SME or RDEC scheme, even if you have an SME company (further details in point 2)
2. How to claim R&D Tax Credits if you have received a grant
One of the key things to be aware of when claiming R&D Tax Credits is whether you have received any grants for the projects you are claiming R&D Tax Credits for. There are two main streams where grants fall into: notified state aid and a grant that is not notified state aid.
Received notified state aid grant: If the grant is confirmed to be notified state aid, your project will be disqualified from R&D Tax Credits SME scheme. It’s worth noting that it is the project that is disqualified, and not the company. So if you have multiple R&D projects, you may still claim for those not funded by notified state aid under the SME scheme.
Received a non-notified state aid grant: you will have three options which all depend on how much the grant funded your respective projects.
- If the grant funds the whole of the project, we would advise you to file under the RDEC scheme, which will allow you to recover up to 8% of your development costs in additional to the grants you have received. This scheme only covers qualifying expenditure such as payroll costs and R&D consumable costs and does not include subcontracted expenses.
- If the grant explicitly funds only the non R&D part of the project such as marketing and commercialisation expenses, then it doesn’t matter whether it is notified state aid or not and will not affect your R&D Tax Credits claim.
- If the grant funds only a portion of the R&D project, you can claim a mixture of RDEC and SME, where the RDEC scheme applies to the amount of your R&D expenditure that has been grant funded, and the SME portion will apply the the remaining R&D expenditure.
The relationship between R&D Tax Credits and grants is often a tricky one and one that you should be careful navigating. For more information about receiving a grant for your project, read this, or give us a call and we would be happy to provide you with some advice about the best way to proceed.
3. Be aware of what qualifies (and what doesn’t!)
Everything on this list is important information to bear in mind when thinking about compiling your R&D Tax Credit claim, but this point is perhaps one of the most crucial. So many things can raise red flags at HMRC, and you want to do all you can to put in clear, qualifying expenditure to avoid an HMRC enquiry. We won’t list out here everything that can be claimed but highlight some of the tips and tricks we have learned (if you do want a full list of qualifying expenditure, click here):
- Tangible assets. We find that quite a few of our clients sometimes file qualifying development expenditure under ‘Tangible Assets’ rather than ‘Intangible Assets’. Claiming under Tangible Assets is tricker than Intangible Assets but it is still possible by claiming it under R&D Capital Allowances; it always depends on how much you are making this year. Generally, if you are profitable, then write it off but if your company is loss making, spread the deductions across the years. If claiming Tangible Assets under R&D Capital Allowances, you are only able to claim up to 100% of the cost, unlike the 230% (or 225% before 1st April 2015) of qualifying expenditure under the SME scheme but something is better than nothing!
- Remember to claim for your company’s financial period (the dates your accounts span) rather than HMRC’s tax year! Although sometimes the two can be the same, you must always double check so that you are claiming the correct amount from the correct year.
- Another common mistake we see in clients’ applications is claiming directors as subcontractors – sadly, this is not allowed. Something we always double check (and so will HMRC) is the directors listed on Companies House; if any of them appear in your claim, HMRC will flag it. Also you can’t claim directors’ dividends against your R&D claim as qualifying expenditure, so avoid doing this as well.
4. Be savvy with your losses
One of the key pointers we have identified after working with over 500 companies is how to move your losses around to maximise your claim. If you’re unprofitable, you can use a mechanism called “surrendering your losses” to get some cash out of R&D Tax Credits even though you have no profits to offset. But should you? The answer is: it depends.
Generally, it would be better to carry the loss forward and offset it against future profits, at a rate of 20% (the lowest corporation tax is charged at), than to surrender it immediately at a rate of 14.5%. However, in order to be offset successfully in future years, there need to be actual profits in those years.
The key concept is: if you are expecting continued tax losses in future years (and don’t forget to factor in future R&D claims in this!) then you should surrender the present loss.
5. Understand how connected companies impact your R&D claim
When claiming your R&D Tax Credits, it must be made clear about whether your company is autonomous or not … and if it is not, how closely connected your company is to another.
During claim filing, we have found that a lot of companies claiming under the SME scheme are sometimes under the umbrella of a larger (going by HMRC’s definition of ‘large’ as mentioned in point 1) parent company and this affects whether they can claim under the SME or the RDEC scheme.
In short, your company is considered to be linked to another company if one of the following is true:
- the other company owns more than 50% of the voting rights,
- they can appoint or remove any of your management team,
- they can exert a “dominant influence” over your company,
- they can indirectly achieve the above via agreements with other shareholders.
Basically, if they control your company, you are “linked” and likely to be unable to claim under the SME scheme. You can claim under the RDEC scheme instead, but only if the other company is a large company, when their consolidated accounts are examined with the criteria mentioned in point 1.
If a company owns between 25-50% of your company, they are considered a ‘partner enterprise’ and you could still fall under the SME scheme even if the partner enterprise is a large company.
But there are exceptions to that rule: you can still be autonomous with an enterprise owning over 25% if they do not exercise control. It is possible for an enterprise to be considered autonomous even if the 25% threshold is reached or exceeded by any of the following investors:
- public investment corporations, and venture capital companies (CIRD92100),
- individuals or groups of individuals with a regular venture capital investment activity who invest equity capital in unquoted businesses (‘business angels’), provided the total investment of those business angels in the same enterprise is less than €1.25 million,
- universities or non-profit research centres,
- institutional investors (CIRD92200), including regional development funds,
- autonomous local authorities with an annual budget of less than €10 million and fewer than 5,000 inhabitants.
- It depends on calculating the shareholding by turnover, balance and staff count of the other company. There’s more information on linked and partner enterprises here.
6. Choose the right project
So, you know which scheme you fall under, what qualifies, how to navigate your profitability and how to deal with your company if it is linked to another – now it comes down to the actual work you carried out. When submitting your technical narrative, you have to ensure you are selecting the right project(s) to claim for.
Typically, a claim will cover more than one project. However, the word “project” can mean a lot of things depending on the context. A “project” might be a whole product, as delivered to the market; for example, a project could be Microsoft Word. Alternatively, it can be the case that all the R&D developments of a company fall under a single outside facing product. Then, “project” changes meaning to focus on major features or major challenges while developing that product.
Choose wisely as this is your big moment to demonstrate your technical uncertainty to HMRC, and then get writing a cracking technical narrative (point 7).
7. Write a cracking technical narrative
We have numerous articles about assembling the skeleton structure of your technical narrative, how to nail the narrative even before you begin writing it, as well as a real-life example of a technical narrative from our co-founder Daniel’s old company, Woobius, so this is a short list of the key things to remember when building your technical narrative:
- Most importantly, write your narrative from a technical perspective, not a managerial one. This is a common error where clients write about process issues like the users/customers constantly changing their requirements, the delivery being off schedule and impacting dependencies or difficulties getting the project funded or approved. Unfortunately, unlike you, HMRC doesn’t care about these when reviewing your R&D Tax Credit claim. Remember, they want to see evidence that you solved a technical uncertainty, so be sure to show how hard you worked and wrangled out a solution for your project – usually, the trickier a project was, the more likely it was that it was R&D.
- KISS. AKA: keep it simple, silly. HMRC doesn’t have time to read pages and pages of your narrative, even if you put your valuable time into writing it. Generally, having a long narrative won’t increase your chances of a claim being accepted. Instead, we would advise you put your energy into writing a cracking and to-the-point narrative of 1-3 projects, covering 2-5 sides of A4. As Mark Twain put it “I didn’t have time to write a short letter, so I wrote a long one instead” – don’t bore HMRC. Keep it short and sweet and effective.
- Don’t use jargon. HMRC needs to be able to read and understand the narrative and dropping buzzwords in to try and over-pitch your project will be obvious to them. If necessary, get a layman to have a look at the narrative and see if they understand it before sending. Be vigilant about jargon creeping in.
- Don’t be scared to include details about projects that failed for technical reasons – this will demonstrate to HMRC that the project is tricky and hard to solve, even by competent professionals.
8. Balance the tech narrative to the size of the claim
A quick one – but essential nonetheless. Make sure your technical narrative reflects the size of the claim. As mentioned above, there’s no need at all to write pages and pages and even less of a need if your claim is relatively small.
9. Prepare the CT600 accurately
The CT600 is the blue document you submit each year (sample here) along with your computations that gives HMRC an outline of your tax position. We always prefer to send in an amended CT600 rather than wait and include your R&D claim figure in the original, as we have found this is the quickest and safest way for HMRC to receive and review your claim.
It is essential that the amended CT600 is prepared in the correct way to avoid HMRC investigating and to make sure your claim speeds as quickly as possible through HMRC’s labyrinths. Check out our full ‘Preparing the CT600’ article for full details on how correctly amend your CT600.
10. Reconcile, reconcile, reconcile
And finally before you file, go through with a fine tooth comb and double (triple, quadruple!) check that all numbers you have included in the calculations can be matched back to your P&L, the tax computations and the CT600. Nothing is a bigger red flag than if you are claiming £200,000 for subcontractors in your claim and there is only £45,000 against ‘Subcontractors’ in the P&L. All costs must be matched and consistent with each other so it is easy for HMRC to identify what costs are located where.
Phew. That’s it. You’ve survived reading about locking down the essentials for your R&D Tax Credits claim – that’s (almost) half the battle. You should be well-equipped to tackle your application now with these insider tips and if you ever need guidance or advice, get in touch and we will be happy to help in whatever way we can. Good luck.
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