I’m sure that we’ve all heard of the Research and Development (R&D) Tax relief scheme, as it has been widely promoted by government as one of the key support areas, leading to innovation in UK industry.
At KSK MK, we have been assisting clients with claims for R&D since its inception in 2000/2002, and have tracked our client’s activities to ensure that they are identifying all relevant opportunities for claiming what is a fully justifiable and advantageous relief, to assist them with the funding of their business.
Just looking at the headline relief at the current time, this currently gives an uplift of 130% on qualifying expenditure for small and medium-sized enterprises, which, at the current levels of corporation tax, equates to approximately 25% of the amount spent. Alternatively, the relief can be surrendered for a refund, which is very helpful, if the company is loss-making at the current time. We have assisted with refunds in excess of £500,000 in respect of one client for a number of years, whilst they have been in their development phase. A not insignificant sum, I think you will agree.
So, a really relevant relief, and one not to be ignored, in any scale of organisation.
Each claim needs to be made in respect of a relevant R&D project, which seeks to achieve advance in science or technology through the resolution of technological uncertainty. This uncertainty can seek to:
- create new or extending existing product lines
- exploring ways of doing things better or in a more cost-effective way
- trying to meet new regulatory requirements
- investigating new components or materials: or
- investigating new uses of existing components and materials
Every project is necessarily required to be assessed and determined by a Competent Professional, and that cannot include ourselves as tax advisers or indeed HMRC! Most businesses, who are undertaking some form of process, , for example, IT-based, or manufacturing, may well qualify to claim R&D tax credits, and most of the business owners or developers will know why they are doing it and whether they are making technological advances in their own businesses, when compared to their competitors. In making a claim, it is necessary to determine the scientific or technological uncertainties, and to ensure that these are documented in an adequate way, so as to identify that advancement. The writing of the report on the project does not have to emulate War and Peace; it should be succinct, clear and to the point, and address areas such as:
- solution uncertainty – can a solution be found;
- part uncertainty – how can this be achieved;
- systems uncertainty – testing existing systems in an unproven way;
Having determined these uncertainties, the Competent Professional needs to understand which parts of the project will qualify and then identify the boundaries, that are set, and when the project becomes viable or is terminated.
As long as the Competent Professional can identify this scoping of the project in a succinct document, the rest of the process of making the claim is relatively straightforward.
We can assist with helping to identify and capture the relevant costs (not everything you may think does qualify to be included within the claim), and then to undertake a sense check on the result to ensure that it does not look out of place, in terms of our knowledge of the business. As accountants, we can then assist with the submission of the claim through the corporation tax mechanism, and then to deal with any questions arising, including liaising with the client, and HMRC, if the claim is scrutinised.
On numerous occasions we have had calls from satisfied clients who have been surprised at the speed of the repayment, bearing in mind that R&D claims can be submitted up to 2 years after the end of the accounting period in question. Sometimes clients, and indeed, new clients, have not assembled the data, or completed their documentation at the time that the accounts are prepared, and as a consequence, pay normal levels of corporation tax, before refunds are received.
Our advice is that planning should take place with regard to the potential to make a claim, before any project is started. It should be an integral part of the project planning process and should not be ignored or left as an afterthought. In that way, all costs can be identified readily, and data captured, to the sufficiency required; for example, the most difficult area is to capture the time spent by all individuals involved in the project, which would ordinarily require the maintenance of timesheets and records from the start of the project, albeit that as long as the company maintains adequate records, these can be reassembled from historic data.
And what is the cost of this particular exercise, you may ask; we have wide experience throughout our senior management team of this process, having been involved with it for over 15 years, and with certain members of our staff having direct experience through family businesses, who themselves have made successful claims. As such, we can identify, very readily, what needs to be achieved, and whether the business owner is a Competent Professional; in almost every case, the business is quite capable of creating adequate project notes, and having worked with them through the process, and having given them detailed guidance notes, our fees are based on the time spent with the business owner. We do find that in subsequent years of any claim, the business owner is quite capable of replicating or creating new notes for new projects, with limited input from ourselves, other than to sense check calculations, and to ensure that all costs are either included or excluded as appropriate.
Do not be fooled that you need an external Consultant to assist with the process; we have seen numerous cases where companies have involved external experts, having been sold the process by some form of telesales or marketing link, signing themselves up to part with somewhere between 20% – 30% of the tax refund achieved anywhere up to 6 years, even if there is very limited input from that expert in subsequent accounting periods. A very nice little earner, as they say, which, for the sake of comparison on a potential refund of £50,000, which is not unusual would properly equate to £12,500 per annum, against a time charge from ourselves of possibly £2500 – £3000, with you, the client, acting as your own Competent Professional.
It is not difficult, and if you wish to discuss the matter with our experienced staff, please feel free to give us a call, and we will be happy to hand out our “easy to understand” notes on the process.
By Paul Davis