You don’t make over 100 claims a year and save your clients almost £10million in tax without learning a thing or two about R&D claims and some of the common mistakes which occur.
R&D tax reliefs are part of the government’s strategy to incentivise innovative companies and offer generous tax reliefs to companies investing in R&D.
The biggest mistake companies can make is not exploring the possibility of making R&D claims and assuming they do not qualify because they are not the stereotypical “men in white coats” type of business. The stats still show that many companies are missing out but what about those who are making claims? Well obviously this is good news but not the end of the story and many are still not maximising the return from their R&D claims with the same old mistakes coming up time and time again…
1. It’s innovative but not my R&D
It’s amazing how many times we have this conversation with clients, especially in the manufacturing sector, although not an issue unique to this sector. So they have been asked to work on something really innovative and boy was it a challenge, sounds like R&D right? Well not in their mind because it is just a part of a bigger project for a large client and therefore not their R&D. In reality however, there is still an opportunity to make R&D claims, worst case scenario a Research and Development Expenditure Credit (RDEC) claim for R&D subcontracted to an SME. There is even the possibility to make an SME claim where the project has involved the development of products, knowledge and processes which are transferrable to other projects.
2. Small changes can bring big results
The industries and sectors in which innovative companies operate do not stand still. Many companies develop an innovative product, make one or two R&D claims and everyone lives happily ever after, but everyone loves a sequel, well maybe not in the film world. Even if companies are not developing new products or processes, if they are continuing to enhance, improve or fix existing innovative products or processes there will likely be scope for claims and even if these are smaller amounts they can still add up.
3. Indirect staffing costs
Once companies are okay with making R&D claims, they quickly recognise directly qualifying R&D costs, so your lab technician carrying out experiments, your developer carrying out software developments, your engineer manufacturing precision parts, etc. What many companies do not appreciate is that there is also indirect qualifying R&D which could encompass support staff, finance staff and non-technical directors. This is fully accepted by HMRC who appreciate R&D is a broad process and involves those doing the core R&D but also those who indirectly facilitate this, something which can significantly enhance R&D claims.
4. Are dividends still a winner?
When working with the SME market and owner managed businesses we must consider the best and most tax efficient means of profit extraction. Dividends are normally the winner compared with salaries, however dividends do not qualify for R&D purposes. Generally at low levels of R&D dividends will still beat salaries, however there are occasions where companies are missing out, specifically where R&D makes up a larger proportion of time for example for technical director. In such cases a switch from dividends to salaries can significantly reduce the overall tax paid.
5. Get a little help from your friends but get it right
If you are a company who carries out all its R&D internally then all the power to you but if you need a bit of help now and again from external parties you need to ensure you get this right. Something as simple as contracts detailing the provision of services, IP ownership and clauses around the future use of any IP can potentially blow a whole R&D claim. There is also the need to differentiate between subcontracted R&D and the provision of Externally Provided Workers (EPW’s), addressing this early can ensure future R&D claims are maximised, especially under the large regime where there are subcontractor restrictions.