How to Maximise your R&D Tax Credit Claim
Sometimes when we review claims prepared by others who may not be fully familiar with the tax legislation and HMRC guidance, it becomes evident that they have not been maximised to their full potential. Sometimes certain cost categories can be overlooked, and this can have a significant impact on the cash the claimant receives.
In this article we take a look at some of the costs that can be overlooked. Make sure your adviser reviews these with you to ensure you get the full amount of relief you are entitled to.
As most people are aware, you can include the payroll costs (gross wage, employers NICs and employers pension) of those employees directly engaged in undertaking the qualifying R&D activities. Less known is the fact that you may also include the above costs for employees who indirectly supported the R&D activities.
Within the HMRC guidance, this is what is known as “Qualifying Indirect Activities” (QIA’s). The list of activities that are regarded as QIA’s can be found at paragraph 31 of the BIS R&D Guidelines (this is one of the documents that the government uses to define R&D for tax purposes). The guidelines can be found here. We often find including QIA’s can have a significant impact on the amount of cash received by the claimant.
This is one of the oddest rules in the R&D tax credit legislation which helps to explain why it is so often overlooked. Let’s take the example of an employee taking a train to attend a meeting for R&D purposes. If that employee paid for the train ticket themselves and put in an expense claim with their employer to get the money reimbursed, it can be included in the claim. If on the other hand the employer paid for the train ticket directly, or the employee used a company debit or credit card, the cost cannot be included – strange I know, but this is the rule. So, if you can, make sure you include reimbursed travel costs in your claim.
In our previous article we covered the impact grants can have on your R&D tax relief claim. Basically, a grant which is notifiable state aid, received specifically for a given project, would create a situation whereby all that particular projects costs would need to be included in a large company (RDEC) claim. This is not desirable as the large company RDEC claim provides a much lower cash benefit than a Small and Medium size (SME) company claim.
However, if the grant is directly distributed by the EU or is not notifiable state aid, it may be possible to apportion the costs of that project between the more generous SME claim and the large company RDEC claim. This is not often realised.
Say the grant covered 50% of the qualifying project costs, 50% could therefore go into the SME claim (and receive up to 33.3p for every £1) and the subsidised 50% could go into the large company RDEC claim (and receive up to 10p for every £1). We do sometimes see claims whereby 100% of the costs have been claimed under the less generous large company RDEC provisions whereas a proportion could have been claimed under the SME rules.
Therefore, identifying the grant and understanding its impact on your R&D tax relief claim is fundamental. Failure to do so may mean over claiming (and potentially facing penalties) or under claiming and missing out on what you are entitled to.
Electricity, Gas and Water
Sometimes overlooked is the fact that you can include an amount for your light, heat and water costs in your R&D tax credit claim. The total cost recognised in your profit and loss account can be apportioned between R&D and non-R&D activities on a just and reasonable basis. This may only have a modest impact on your claim, but for energy intensive R&D activities, this can be significant.
If you have subcontracted some of your R&D activities to another company, under normal circumstances you can only include 65% of the amount charged by that subcontractor. If however the subcontractor is a connected company (or willing to elect to be treated as such) then it may be possible to include more than 65%. Basically, the 65% restriction is there to account for the assumed profit element within the subcontractors’ charge, i.e. HMRC assume that 35% is pure profit. If you can show that the profit was say just 10% you could include 90% of the charge within your claim. This is often possible when the subcontractor is connected. It is probably unlikely that you will be able to get a non-connected subcontractor to reveal exactly how much profit they made on the contract with you, but where the companies are connected this may be possible.
There are specific rules surrounding this, but if applied correctly this could materially increase your cash repayment due.
The above highlights just some of the issues we occasionally see when reviewing claims prepared by non specialists. We would always advise that you make sure you or your adviser have considered each of the above to ensure that your claim is optimised and you are receiving the right amount you are entitled to.