5 Ways to Speed Up an R&D Tax Credit Claim
R&D Tax Credits 3 mins read 20th Apr 2020
Know your onions when it comes to R&D tax credit eligibility
This is the most important and the hardest part of the process. Everyone wants to maximise their rebate but incorrectly claiming for things is an instant red flag for HMRC and could delay your claim or trigger an enquiry.
For things to move quickly, first acquaint yourself fully with the costs that qualify for R&D Tax Credits. The list of ‘qualifying expenditures’ is as follows:
1. Direct staff costs
The cost of paying employees that worked directly on the R&D project. Costs that qualify are salaries, wages, Class 1 NIC’s, pension fund contributions, bonuses, reimbursed R&D-related travel costs. Simply multiply total annual emolument by percentage of time said employee spent on R&D to give apportioned amount.
2. Externally provided workers
EPWs are temporary workers sourced from an external agency. Their contract is with the agency, not with you. Tax relief is usually given on 65% of the payments to the external agency, regardless of the size of your company.
3. Subcontracted R&D
Like EPWs, companies can claim up to 65% of their subcontracted R&D costs. Usually only SMEs can claim for Subcontracted R&D expenses. Large companies are unable to claim unless it’s undertaken by “a charity, higher education institute, scientific research organisation or health service body — or by an individual or a partnership of individuals.” i.e a contribution to independent research.
If software was purchased purely to be used in R&D then you can claim 100% of its price in your application. If the software package is only partly employed in R&D, its price must be apportioned.
5. R&D consumables
Consumables are materials and resources that are used or ‘used up’ in the R&D process. Primarily materials but also water, light and heat. Electricity costs cannot be claimed. Consumable costs generally fall into one of two groups: apportioned expenses (a calculation of a percentage of utilities bills attributable to R&D) and wholly R&D expenses.
First rule if you want to claim for a prototype: be aware that selling it reduces the qualifying costs. Generally though, costs associated with the design and construction of a prototype needed to test the R&D you’re undertaking are eligible for R&D Tax Credits relief. 100% of these costs qualify.
7. Clinical trial volunteers
Only relevant to pharmaceutical firms but payments to clinical trial volunteers are eligible.
8. Contributions to independent research
These are payments made by large companies to other organisations carrying out eligible R&D. There are stipulations – the recipient must be conducting research relevant to your field or industry. The recipient must be also “a qualifying body” – a charity or higher education institute, scientific research body or health service organisation – or “an individual or partnership or individuals”.
If you think you have an idea of these numbers, why not input them into our simple online R&D tax credits calculator to see what you could be in line to receive.
File an amended CT600
Whilst the temptation might be to roll the R&D Tax Credit claim into your end of year tax return with a view to getting it off your desk, we frequently recommend a different approach. File the accounts and tax as normal, with no reference to R&D. Then file an amended version later, which includes the R&D claim.
In doing so you’re ensuring that the claim is dealt with by an R&D Tax Credit specialist at HMRC, instead of by a general tax office inspector who may not have specific R&D tax relief knowledge. This means less questions, less delays, more speed.
EU law forbids companies from receiving more than one piece of State Aid for a project. The primary concern here has, until recently, been grant funding. However the impact of coronavirus business support schemes has made the state aid factor a particularly hot topic when it comes to R&D tax relief.
The Coronavirus Business Interruption Loan Scheme (CBILS), for example, is a form of state aid. This essentially means that businesses may face a toss-up between survival and strategy. Even if CBILS has been claimed only for a portion of the accounting period and it subsidised a cost relating to an R&D project during this time it can make the whole project ineligible for SME R&D tax relief.
Choose the right projects
How many should go into a claim and what if one project overflows into another, with shared learnings and grey areas?
Let’s use a topical example. Take Zoom, the video conference calling platform. In one sense, we could classify the entire development of Zoom – from initial concept to market delivery – as a single project. In another, we could say that specific changes to the back end of Zoom, for example adding virtual video backgrounds, are projects in their own right.
Deciding how you break down projects (including any that ‘failed’ for technical reasons) should be influenced by the narrative you will put together. A CEO may see 25 examples of eligible and differentiated projects but a good submission will categorise them into 3-5 broader projects. In the Zoom example, the R&D to develop virtual backgrounds might be part of a wider User Experience project, as opposed to, say, integrating the platform with the latest iPhone. When analysed by an outsider at HMRC these project definitions should be palatable and credible. This brings us to our final, critical tip:
Nail the technical narrative
The goal of the technical narrative is to produce a cohesive text that presents the company’s R&D work in a way that passes HMRC’s inspection without further questions. This requires a laser focus on the technical aspects.
- Do not get bogged down in decision-maker issues concerning e.g. process, customers, governance of the project – HMRC don’t care.
- They are looking for proof that you overcame a technical uncertainty or made a technological advance. Most businesses don’t need to write a thesis but be sure to tie the length of your technical narrative to the monetary size and complexity of the claim. Generally, aim for a concise, vibrant narrative.
- Don’t overuse jargon – the people that read claims are not necessarily specialists in your field, they are specialists at spotting R&D in the real world. You can’t bamboozle your way to victory!
R&D tax relief is a highly specialised area. We admire any company tackling a claim under their own steam but if you would like assistance to ensure maximum speed and accuracy, please get in touch.