Author Archives: innovation tax specialists
Author Archives: innovation tax specialists
In this short video, we provide an insight into the elements of what makes up a qualifying claim for R&D tax credit purposes.
Often companies are unsure of what a successful claim might look like so here we summarise key characteristics (not exhaustive) including:
No single qualifying R&D tax project is ever the same but these are some of the common attributes that might help you think about whether you have been undertaking project work that might qualify under this generous UK government tax relief.
Here is a short video summary of the key findings from HMRC's annual report on Research and Development Tax Credits dated September 2017:
The statistics relate to the 2015-2016 year and show a promising uptick in claims for R&D tax relief from previous years. This is no doubt due to an increasing awareness by first time claimant companies plus repeat claims by those companies already claiming.
Key findings from the HMRC R&D Tax Credit Statistics (2017):
These figures are encouraging but there is still further to go before all of the companies that could claim - do claim. From our experience, the cashflow benefits of R&D tax claims can be significant to a company and therefore it is important that all companies give this tax relief some detailed consideration.
You can access the full HMRC analyses and documents here.
Here we share some inspiration from across the web:
Philip Hammond delivered his Spring Budget Statement today kicking off his first tax announcement directly addressing the importance of the UK R&D Tax Credit incentive to business and the UK's worldwide competitiveness
"As I committed at the Autumn Statement, we’ve reviewed, with business, our R&D tax credit regime and concluded that it is globally competitive.
But to make the UK even more attractive for R&D we have accepted industry calls for a reduction in administrative burdens around the scheme and will shortly bring forward measures to deliver them"
- Rt Hon. P Hammond, Chancellor of the Exchequer
Any efforts to reduce the administrative burden and make the R&D tax relief more accessible to companies is welcomed.
We look forward to hearing more about proposed improvements and helping companies make the most of this most generous UK Government tax incentive
The Research and Development Expenditure Credit ('RDEC') is a Government tax incentive available to Large companies and replaces the legacy enhanced corporation deduction (30%) with effect from 1 April 2016
This supplements the SME R&D Tax Relief and applies to companies that are not defined as SMEs or certain situations where the SME R&D tax relief is not available to SMEs (see further below)
The RDEC provides a reduction in corporation tax payable for profitable companies or a repayable tax credit for loss making companies that equates to 8.8% of the total qualifying R&D expenditure in the period
SME - subsidised expenditure
SME > €7.5m
Companies (or groups) that fail the SME thresholds for R&D tax purposes - see further below
SMEs acting in capacity of subcontractors on behalf of Large Companies
SMEs in receipt of grant funding or other subsidised R&D work
SMEs that exceed the maximum SME project expenditure limit of €7.5m
A SME is defined for R&D purposes as a company with:
Group companies need to be considered plus linked or partner enterprises as part of this test
The following costs are eligible under the Large Company RDEC scheme:
This is broadly similar to the definitions for SME R&D tax credits although particular note should be taken of the more restrictive interpretation of qualifying subcontracted costs
The current rate of uplift on qualifying expenditure under the RDEC is 11% (10% up until 1 April 2015)
The 11% uplift is applied to the total of the qualifying expenditure for R&D tax purposes under the Large Company scheme
Up until 1 April 2016, companies could elect to claim the enhanced R&D tax deduction under the Large Company Scheme of 30%. No R&D tax cash credit was available under this legacy scheme. This legacy Large Company enhanced R&D relief was phased out in full with effect from 1 April 2016
The RDEC operates differently to the SME R&D tax scheme in that the uplift on qualifying costs creates a taxable receipt in the profit & loss account - this compares with the SME scheme that recognises the benefit of the R&D tax relief solely through the company's corporation tax line in its statutory accounts
The credit to the profit and loss account increases profits or decreases losses in the period. This is why it is often referred to as an ' above the line' credit
It is recognised above the line in order to reflect the benefit of the R&D tax relief to the company as it can otherwise be overlooked when processed solely through the tax line - treated in this way, it is more akin to a grant in how it is reflected in the company's accounts
The credit is taxable and - assuming a corporation tax rate of 20% - the cash tax benefit is currently 8.8% of the qualifying R&D expenditure
Profitable company example
Less: qualifying R&D tax costs
R&D Tax Credit @ 11%
Profit before tax
CT @ 20%
Less: R&D Tax Credit
Revised tax payable
R&D Cash Tax Benefit = £35,200 or 8.8% of the £400,000 qualifying R&D spend
Loss-making company example
Less: qualifying R&D tax costs
R&D Tax Credit @ 11%
Loss before tax
CT @ 20% (on R&D tax credit)
Less: R&D Tax Credit
R&D cash tax credit payable to company *
R&D Cash Tax Benefit = £35,200 or 8.8% of the £400,000 qualifying R&D spend *
* Note that there are other conditions that must be satisfied before a cash tax credit is payable to the company under the RDEC scheme (see further below)
The 7 stage process is designed to ensure that only those companies that are up-to-date with their tax affairs and payments can benefit from the cash tax rebate option
We are going to simplify the 7 step test to 'just' 5:
Deduction of corporation tax at main rate
The repayable tax credit is payable only after first deducting the corporation tax due (including on the tax credit) in the period
PAYE / NIC cap
The repayable tax credit is capped by the PAYE/NIC amount paid by the company in the period in relation to the staff engaged in the R&D - note that this cap does not take into account the % apportionment applied to the employee staff costs as part of the claim calculation
PAYE / NIC / VAT arrears payable first
The repayable tax credit is payable to the company only after HMRC has checked for any arrears in relation to corporation tax, PAYE / NIC or VAT that will be deductible against the credit in advance
Optional set off against group company CT liabilties
The repayable tax credit is offsetable against corporation tax liabilities of group companies in the period
Going concern requirement
The company must be a going concern to be entitled to the cash tax credit
Yes, you read it right - we've simplified the 7 stage test into 5 to capture the essence of HMRC's requirements
Aside from the fundamental difference in application and approach to give effect to the tax relief within the financial statements of a company, the definitions of R&D remain the same
A company is required to prepare and file a justification report that supports the underlying nature of the qualifying project work along with supporting claim calculations
In terms of the qualifying expenditure there is one key difference and this is in relation to subcontracted costs
Subcontracted costs to companies are not eligible under the Large Company scheme. It should be noted that 'externally provided workers' (EPWs) are an eligible cost and therefore it is more important than ever to get the distinction right between EPWs and subcontractor relationships
It should also be noted that in the more restricted situations where the subcontracted costs do apply (e.g. for work subcontracted to qualifying bodies such as Unis or to individuals), the 65% cap that applies under the SME relief does not apply
The RDEC is applied in a fundamentally different ways to the SME R&D tax credit scheme and therefore there are number of issues to consider:
The RDEC has been designed to work alongside the Patent Box and therefore companies with qualifying patents should ensure that they have considered how to optimise the Patent Box tax relief in addition to the RDEC
We are specialists in R&D tax advisory and can offer an end-to-end solution in preparing and filing your RDEC claim with HMRC
We are also accountants so this means that we can also advise on how your claim fits into the 'bigger picture' of your overall company tax profile
Give us a call for a no obligation discovery call:
HM Revenue & Customs has recently released a "simple" guide for companies seeking to claim research and development tax relief (R&D tax credits).
With the subtitle "Making R&D easier for small companies", the guide is useful for companies that may be new to this tax incentive as it seeks to cover the key principles for qualification, eligible costs and some common areas of complexity (e.g. SME definition, subcontractor status etc).
Here's what we like about it:
There's not a lot not to like about this guide and it is a useful addition to the overview that HMRC already provides (which is a bit more generic).
You can download the R&D Tax Relief Simple Guide here.
It is all too easy for UK technology startups to get bogged-down in the red-tape of running a business. Founders are frequently caught up trying to keep on top of books and records to ensure compliance with UK government and HM Revenue & Customs requirements - especially with one eye on a 'clean' future exit event.
This compliance distraction is often at the expense of the myriad of government tax incentives that exist to provide financial and cashflow support to UK startups and fast growing clever companies (potentially a significant expense if missed...).
During the early funding rounds, the Seed Enterprise Investment Scheme ('SEIS') and Enterprise Investment Scheme ('EIS') can provide a much welcomed boost to equity financing - It seems that the attraction of the SEIS and EIS tax incentives have caught the imagination of many tech startup entrepreneurs and business angels alike and we continue to help increasing numbers of start-up companies access and navigate these tax incentives.
"Yet we continue to be surprised by the number of tech company founders who are unaware of the R&D tax credits incentive and the potential positive impact this tax relief could have on the company's cashflow (potentially year on year)"
The R&D tax incentive can be claimed alongside the SEIS and EIS tax reliefs to help provide a further boost to the cash equity injection. Also, don't forget that the R&D tax credit relief aims to complement the UK Patent Box tax incentive.
Tech startups can recover up to 33% of the costs that they have incurred on qualifying R&D projects and with the level of innovation across the UK in the tech space, these claims are becoming increasingly commonplace.
So if you are the founder of a tech company in the UK (or from abroad if you have a UK branch), make sure you don't miss the cashflow funding benefits of the R&D tax credits incentive.
Following on from a successful R&D tax credits claim totalling £245,000 when we were first engaged to act last year, our client has just secured a further £188,000 in cash tax relief under the UK R&D Tax Incentive!
Our initial claim totalling £245,000 covered two accounting periods and has since allowed the company to expand its software development team thereby accelerating its progress.
The company was profitable in its most recent financial period and therefore our claim for enhanced R&D tax relief wiped out a corporation tax liability of £54,000 AND created a tax loss that the company could surrender for R&D tax credits totalling £134,000.
The Company is engaged in the development of CRM software architecture. The nature of its technical work involves the development of proprietary algorithms capable of optimising the interactions of the CRM system with its users.
If your company is engaged in the field of software development, please contact us to discuss your potential eligibility for R&D Tax Credits further
"SEIS" and "EIS" are very much buzzwords in the world of startups and funding right now. You may have already secured advance assurance from HMRC that your company qualifies under either or both schemes but then you start to wonder - what next...?
Here we share some practical pointers on what you as the Founder should consider as your next steps:
Understand your obligations to your investors. Take professional advice particularly in relation to your offer document and any shareholders agreement. It is fresh issues of shares only that qualify under SEIS & EIS. Also, remember your obligations extend for at least three years beyond the issue of the SEIS / EIS shares to your investors
No Founder can be without a detailed spreadsheet share cap table with each step mapped out from the Founder (subscriber) share issues and then for each round thereafter (SEIS, EIS and onwards). This allows the Founder to keep track of respective valuations, % shareholdings and to observe dilutions at each stage
That order ONLY. So if you are planning on fundraising for both (and you have advance assurance for both) ensure that you allow at least ONE day to pass between the issue of the SEIS shares and the EIS shares thereafter
A ‘nice to have’ problem that many Founders would be envious of (!) but make sure that any share subscriptions from investors do not breach the ‘gross assets’ test at the time of the share issue. More likely to be a problem under SEIS with its lower £200k gross assets limit
This is where your nifty spreadsheet will come into play. Make sure that % shareholdings are shown and that no SEIS / EIS investors ever exceed 30%. Watch out for “associates” whose shareholdings will be aggregated e.g. spouses, parents, grand-parents, children, grand-children (brothers & sisters are okay)
We have a further 5 tips for Founders (so 10 in total) that we have pulled together into a handy one-pager PDF tip sheet. You can download it now via the link below