Tax From the Trenches - You Could Save Thousands In R&D Claims
I have just completed my expenses sheet for this month. It turns out I travelled near around 650 miles visiting clients in Essex, Hertfordshire, and Kent! A few of the meetings were HMRC enquiry based, but most of the visits were to clients to talk about their Research & Development (R&D) claims.
I'll be honest...I enjoy these meetings the most. Of the ten R&D meetings I’ve had this month, two new clients who I established very quickly on the phone were carrying out qualifying R&D activities in the manufacturing industry. Two other visits were second meetings with new clients, and I wanted to talk through our draft figures with the directors. The remaining meetings were with our regular R&D clients who are at various stages of this year's claim process.
I have to say, R&D is a wonderful thing. The objectives of the R&D schemes are to ensure that the UK remains a competitive location for companies involved in cutting edge research, and that the reliefs available for companies that innovate are fit for purpose and rewarding. It is worth noting that, in the Spring Budget 2021, the government launched a review of the two R&D tax relief schemes - the Research and Development Expenditure Credit (RDEC) and the Research and Development tax relief for small and medium-sized enterprises (SMEs). One of the issues considered was a rise in abuse of the schemes and concern over boundary-pushing that HMRC says has been on the increase in recent years. Some advisers (many with no background in tax) have entered the marketplace, looking to take advantage of companies who are unfamiliar with claiming for R&D. This exposes claimant companies to significant tax risks.
In my opinion, any good R&D specialist firm looks to work with their client as a form of partnership. I, for one, enjoy the opportunity to visit clients and talk through their technical innovations and discuss their qualifying costs. Any R&D firm that doesn’t make the effort to see the client (unless geographical location is a genuine issue) should be avoided. Even worse are R&D firms that encourage companies to submit their own estimate of costs with very little explanation, and even less checking.
With all this in mind, I thought I would use this month's blog to highlight some of the qualifying activities in sectors that Raffingers deal with.
Examples of R&D within Manufacturing:
- Design and development or new machine prototypes with new functionality
- Waste reduction through machinery or process innovation
- Integrating technically complex manufacturing processes
- Design or manufacturing of novel or bespoke tools for product manufacturing
- Development of machinery or forming processes with greater precision, or using new materials
- Methods to reduce environmental impact using alternative processes or material
- Scaling up or increasing the precision of processes with new materials or machinery
R&D within Construction can be identified within three areas:
- New Builds – R&D can range from; reducing project time through innovative methods, the development of unique solutions to overcome challenges and the utilisation of novel materials to yield building performance improvements.
- Renovation – This includes work on heritage buildings which require; unique solutions to restore original structures, the integration of modern services and techniques into existing infrastructure, and the development of strengthening solutions for aged buildings being repurposed.
- Commercial Property – Examples include the installation of specialist security systems, construction of unique building aspects and the development of novel techniques for unusual buildings or projects with tight constraints.
...but what about the type of costs that qualify?
The claim can include a proportion of relevant individuals' salaries, Class 1 NIC and paid pension contributions. The proportion is to cover employees who directly undertake R&D work and includes supervisory & managerial time spent specifically directing employees on R&D activities. Support staff costs do not qualify, except to the extent with which they are engaged in the qualifying indirect activities.
Externally Provided Workers
Staff costs paid to an external agency for workers engaged in the R&D project. Relief is restricted to 65% of the payments made to the staff provider. Special rules apply if the company and staff provider are connected or elect to be connected.
Subcontracted R&D has different rules depending on whether the company is an SME or a Large Company. Further rules apply if the companies are connected. As a general rule, only 65% of subcontractor costs can be included in the R&D claim.
The cost of items that are directly used and consumed in qualifying R&D projects may form part of the claim for R&D relief. This category includes materials and the proportion of water, fuel and power consumed in the R&D process.
You may claim for the cost of software that is directly employed in the R&D activity. Where software is only partly employed in direct R&D, an appropriate apportionment should be made.
So, is it worth it? Yes absolutely. I totalled up the ten claims where I visited clients this month and we are expecting to receive corporation tax and R&D tax credit repayments totalling just over £730,000!