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Here are five R&D tax credit tips primarily aimed at software development companies in the UK.
You may already be claiming R&D tax relief, or you may be looking at your first claim, either way here’s just a few tips that may help you get the most out of your claims.
1. Overseas Developers
The first thing to think about is where your employees or subcontractors are located. It’s quite common for software companies to outsource their work – to stay quite ‘light’ as a business themselves.
That can often mean that many founders think:
“Well, my employees aren’t in the UK, therefore, I can’t qualify for R&D tax relief.”
That is NOT the case. You can still qualify for R&D tax credits.
What matters is where your company is located. So, if you’ve got a limited company that is registered in the UK, and it’s subject to UK corporation tax, then it is within the bounds of R&D tax relief.
It doesn’t matter where your employees or your subcontractors are based. It’s where you as a company are based that is critical. Again, don’t dismiss it. It could well come into play for you there. Don’t be put off. You may well qualify for R&D tax relief on that expenditure.
The next one to watch out for is grants. Grants can cause all sorts of problems in terms of R&D tax relief primarily because there are two R&D tax reliefs. There’s the SME relief and there’s the RDEC (Research Development Expenditure Credit relief.
The SME relief is the one that applies to most companies. It’s the most generous of the two reliefs. So that’s the one you ideally want to qualify for (although the RDEC relief is better than nothing!).
When grants come into play, it means that the SME relief is either entirely excluded or partially excluded.
I won’t get into the details now, but it may well mean that you have to fall back on the RDEC scheme. Now, that’s not half as good as the SME scheme, but don’t be put off. It’s still a relief to be claimed so don’t think because you got grants you can’t claim R&D relief. You can as long as what you are doing is qualifying for R&D activities. There are a few other technicalities to watch out for.
If you’ve already got a grant then you will have to explore the routes and see how it works out best for you. If you haven’t yet taken a grant, it’s often worth crunching numbers first and seeing which one’s going to be better for you.
3. Claim for Past Projects
Another tip is making sure you’re going back in time to claim on retrospective projects where applicable.
You can go back to accounting periods ending in the past two years. So, projects undertaken in accounting periods over the past two years. We’re recording this today on the 1st February, 2019. Assuming you have a 31st December accounting period year end, this means that right now you could go back to projects that commenced in the accounting period ending 31 December 2017 (because that window will close at the end of this year, 31 December 2019). So you’ve got your 2017 December year end still open for a claim and your 2018 year open. So, it’s good if you could go back to projects that started from 1 January 2017. Potentially much that we can claim and capture there.
4. Employee Costs Are Key
Another tip is that, for software companies, one of your main qualifying costs for R&D and quantifying your claim, is going to be your employee costs. So, their gross salary, employers NIC and pension contributions (plus potentially relevant travel & subsistence costs in certain circumstances).
Be aware that where you’ve got subcontractors, there is this blanket 65% cap adjustment applied to their costs. So, whatever costs that they bill you will be restricted to 65% as the maximum amount claimable. And that’s before you take into account any potential % adjustments that you might have to make for the duality of other activities outside of the R&D work.
The 65% automatic adjustment doesn’t apply for your employees.
So, just thinking about how you structure your workforce going forward could impact on your R&D tax cashflow. Also be aware, there is a PAYE cap is coming into force from the 5 April 2020. So watch out for that and think about how you can structure in preparation.
5. Founder Remuneration
Finally, on a similar note, think about your remuneration as a founder. So, for more established companies it can be quite common practice to take a small amount as salary and the rest as dividends.
Be aware that dividends are not a qualifying cost for R&D.
On this basis, think about how you could structure your remuneration package such that you may take more by way of salary (if you’re heavily involved in the R&D work yourself). Think about your taxes more holistically, in terms of both your personal income tax and business tax circumstances. You might achieve a better overall result.