LimestoneGrey’s Information Centre
At LimestoneGrey we work with a range of sectors, industries and clients to help support their R&D tax credits claim. We’ve pulled together a range of answers to some of the common and not so common questions everyone has about R&D tax credit schemes.
Broadly speaking, to be eligible to make an R&D tax credit claim you must meet the following criteria:
- Be a company that is subject to UK corporation tax;
- Be a going concern when submitting your claim, and not be in administration or liquidation;
- Be undertaking qualifying research and development activities [Do I Qualify?]; and
- Have spent money on costs categories such as PAYE [What Costs Can I Claim?]
There are numerous other considerations that need to be investigated when making an R&D tax credit claim, for example, whether you have received any grant funding that could impact the size of your claim, or whether you have undertaken R&D as a subcontractor for someone else.
R&D tax credits is an extremely complicated area of tax – there are lots of factors that need to be assessed and considered when preparing a claim. That is why it is vital to get expert support.
R&D tax credits are a form of corporation tax relief and are therefore only claimable by entities chargeable to UK corporation tax. Sole traders. For example, are not chargeable to corporation tax and therefore cannot access this tax relief.
In the case of an LLP, under normal circumstances, you will not be chargeable to UK corporation tax and will therefore not be able to access this relief. There is an exception to this rule if one of the members is a limited company (a corporate partner). A corporate partner will be subject to UK corporation tax on its share of the partnership profits and may be able to claim R&D tax credits for R&D activities undertaken by the partnership, in proportion to its profit share percentage.
There is no set amount you need to spend in order to submit a claim.
Previously, there was a set minimum spend but as of 1st April 2012, this was removed, in a bid to not penalise small companies and start-ups.
There are two types of R&D tax credit relief: SME Relief and the research and development expenditure credit (RDEC). There are exceptions, but generally speaking, SME relief is only available to SME companies, and RDEC relief is the relief available to large companies.
The two reliefs share much in common. However, perhaps the biggest difference is the size of the cash benefit that can be received. SME companies can currently claim back up to 33p for every £1 spent on R&D whereas a large company can only claim back up to 11p. Therefore, it is vitally important that you determine whether your company is large or an SME.
To be classed as an SME for research and development (R&D) tax credit purposes, you must have fewer than 500 staff and either
a. Turnover of no more than 100m EUROS; OR
b. Gross assets of no more than 86m EUROS
If your staff headcount is less than 500, but you exceed both the turnover and gross assets thresholds, you will be regarded as large for R&D tax credit purposes.
Please note that the above thresholds are in Euros, not pound sterling. Therefore, you need to convert your figures into Euros before applying the thresholds. To calculate your headcount, you need to include all employees on your payroll including directors. Part-time staff need to be converted and expressed as a full-time unit, e.g. someone working 3 days a week would be 0.6. You can exclude anyone on maternity or paternity leave as well as any apprentices on apprenticeship contracts.
There are certain circumstances that can mean a company must make its claim under the large company rules, even though it meets the SME test above. These can include, but are not limited to:
- If you have received grants
- You have been paid to do R&D on someone else’s behalf
When applying the relief thresholds, HMRC considers whether you are part of a larger group or whether you are an autonomous entity.
If a company controls your company, or your company controls another company, then they will be regarded as a Linked Enterprise. This can also apply to companies controlled by the same person.
Control means either:
- Owning more than 50% of the voting rights
- Having power to control or change the senior management team;
- Being able to excerpt a dominant influence over the company
In this case headcount, turnover and gross assets figures must be added together before applying the threshold tests. It is important to note that this does not just include companies and can also include partnerships and trusts.
Partner enterprises are those where the interest is between 25% to 50%. In this case, you take a proportion of their headcount, turnover and gross assets figures when applying the threshold tests. For example, if your company owns 30% of the voting rights in another company, then you would add 30% of their figures to yours.
There are some exceptions to the above for VC’s, universities and institutional investors, amongst others.
Inevitably, businesses change status over their company life cycle, growing from SME to large company, or vice versa, over time. There are a variety of factors that would make this a reality.
A company’s classification as large or SME is extremely important as it determines the type of R&D tax credit claim they can make. An SME company can claim both SME relief or RDEC depending on their circumstances, whereas a large company can only ever claim Research and Development Expenditure Credit relief (RDEC).
There are several differences between the reliefs, the most obvious being their respective cash values. SME relief can generate a cash benefit of up to 33p for every £1 spent on R&D whereas RDEC relief provides up to 10p.
You can find more information on how to determine if your company is an SME or a large company here [Insert Link to SME v RDEC page].
When applying the threshold tests, if a company crosses the threshold in either way in a given period, the company’s status will not change until the conditions are met for two consecutive years. In the accounting period when the thresholds are crossed, nothing changes – you maintain your existing position.
As with everything in tax, there is one exception to the blanket rule. If an SME is acquired by a large group, that SME is then regarded as being large for the whole period. The company’s status changes from day 1 of the accounting period. Even if the acquisition took place on the last day of the period, the company will be large from day 1.
Yes, despite common misconceptions, loss-making companies can still qualify for R&D tax credit relief. The only aspect affected will be the size of your benefit.
Yes, despite common misconceptions, receiving a grant will not prevent you from submitting an R&D tax credit relief. The only aspect affected will be the size of your benefit.
If you are new to R&D tax credits and making your first claim, HMRC appreciates that you will not have in-depth records of your R&D journey, including the amount of time each member of staff has dedicated to your projects. With that in mind, justified estimations in these circumstances would be appropriate.
Going forward, we would also recommend implementing a record-keeping process to keep track of your research and development journey. Even though there are no legal requirements to produce these for your R&D tax credit claim, it ensures that the information gathering element of your next claims is more straightforward. Keeping records will inevitably lead to a larger claim as it minimizes the risk of forgoing key pieces of project information or related costs.
Record keeping measures could include staff timesheets and minute keeping during R&D meetings.
Make a Claim
Typically, it takes between 4-6 weeks to prepare an R&D tax credit claim, however, this is very much dependent on you as a company and how quickly you can gather the information needed. LimestoneGrey has prepared success claims in a much shorter time frame.
The time HMRC takes to process your claim will depend on whether you are an SME or a large company.
HMRC has an internal target to process SME claims within 28 days of submission. Therefore, you can expect your claim to be processed and money to be paid to you fairly quickly.
However, the actual amount of time HMRC takes to process your claim will depend on many factors including the complexity of your claim, the quality of the supporting project report and the intricacy of other areas of your company’s tax return. It can also depend on the time of year your claim is submitted, due to seasonal variation in the volume of submissions needing to be processed.
RDEC claims are not included within the 28-day internal target and often take a little longer to be processed. This is because RDEC claims tend to be made by large companies, who’s tax returns and R&D claims tend to be more complicated. RDEC claims submitted by SME companies also tend to be more complicated, as they often involve grant funding or claims made for R&D activities undertaken on behalf of other companies. HMRC aims to deal with them as soon as possible, and although they are not governed by the 28-day target, in our experience they are normally processed fairly quickly.
LimestoneGrey is a full service agency, allowing us to take care of the claim submission for you. There may be points throughout the process where we need to obtain information from your accountant, namely:
- Copies of your corporation tax return
- Copies of your accounts
- Copies of your payroll documents
However, their input will be minimal, preventing them from billing any additional time costs.
Your R&D tax credit claim is filed to HMRC via your Corporation Tax return (CT600).
If your accountant has already filed your return, that is okay. Our advisers can make an amendment, ensuring your R&D tax credit claim is included.
An R&D tax credit claim is made up of two parts:
This is what quantifies your claim benefit. Your adviser will analysis all your qualifying costs and apply the correct treatment to produce a claim value.
A project report
This is what qualifies your claim. The report incudes information on your qualifying projects and a summary of the costs included in your calculations.
Unfortunately, not all of your R&D costs can be included in your claim. HMRC have set 6 categories of expenditure. Luckily, these 6 categories will encompass the majority of your spend.
- PAYE (staff) costs
- Externally provided workers
- Materials and consumables
- Clinical trials
Unfortunately, there is a time limit on claiming R&D tax credits. You have two years from the end of your accounting periods to make a claim. After this date has passed, so to have the R&D tax relief benefits. If you have an extended year end, it is worth talking to us so we can advise on your situation.
The term competent professional is one that is used frequently within the industry, but what does it actually mean? It is someone in your industry that possesses the experience, skills and qualification in an area of science or technology. This could be an engineer, a developer or a scientist.
When it comes to your R&D challenges, we simply ask you to imagine this scenario. If you were to stand in front of a room of 100 ‘competent professionals’ within your industry and describe the difficulties you were facing in your project, could these professionals work out a solution without the need for any explorative problem-solving activities? If you believe no, you meet this eligibility criterion.
The simple answer to this is yes.
If HMRC have any queries regarding your claim they have the right to open an enquiry and can choose to withhold payment of your tax credit until it is resolved.
There may be a possibility to receive part of the payment. As the enquiry progresses and HMRC agree to certain parts of your claim, you can request payment of the tax credit attributable to that part. Once the enquiry is concluded any balance due to the company will be paid.
HMRC also have the right to open an enquiry into a claim that has already been paid out. This is normally the result of a discovery, where HMRC have come into possession of information that may indicate that your claim was wrong. In these situations, should your claim be proven to be incorrect, HMRC can request that some or all of the tax credit is repaid.
HMRC have the power to charge penalties for inaccurate tax returns. This includes your R&D tax credit claim. The extent of any penalty depends upon several factors.
If you make a mistake in your claim that was completely unintentional, HMRC will take this into consideration and reflect this in any penalties awarded. HMRC can reduce these to £Nil if the error is accidental and you can show that due care was taken.
However, if HMRC found that the error was deliberate and that you tried to fraudulently hide it, then significant penalties can be levied. This can equate to up to 100% of the value of your claim, plus additional penalties if the error was severe.
If you are forthcoming with HMRC and work with them to solve the issue, penalties can be reduced to account for your assistance.
The best way to avoid penalties is to show that you have taken all the necessary steps to prepare a robust R&D tax credit claim that will withstand any HMRC scrutiny.
Using an experienced and specialist Chartered Tax Adviser will ensure this will happen. They will know how to prepare a claim correctly and have experience and knowledge to apply the tax legislation, ensuring you get it right the first time.