As many companies now face unexpected cash flow difficulties, there has never been a better time to apply for R&D tax relief. An R&D claim could reduce the company’s corporation tax payable and in some instances, generate a repayment, especially for loss-making companies. Here are our top tips for anyone considering making a claim.
Qualifying staff costs
For some companies, COVID-19 may increase their R&D activity, e.g. businesses researching a vaccine or sequencing the cause of the virus. However, the likelihood is that, in many instances, the disruption of having to close business premises, reduced staff and subcontractor activity and furloughing of staff will inevitably reduce qualifying costs, qualifying activity or both.
It will, therefore, be essential to consider how best to calculate the “appropriate proportion” of qualifying costs and whether a flat apportionment of costs is most appropriate.
In some cases, it may be more reasonable to split costs. For example, an employee who was previously spending a high percentage of their time on qualifying R&D activity now cannot undertake any R&D work remotely and is furloughed on a potentially reduced salary. In this instance, apportioning on a monthly or weekly basis could produce a far better outcome than a flat percentage apportionment of total costs over a year, and more accurately reflect the way costs and activity matched.
Going concern and accounting periods
In addition, a key condition for making an R&D claim is that the company has to remain a going concern at the time the claim is made. We would, therefore, encourage all claims to be submitted as soon as possible if there is a risk that the company may fall foul of this before a claim is usually submitted, preventing the vital support that R&D tax relief offers businesses.
There is a relaxation on the Companies House filing deadlines in place at the moment. However, there is friction between this and the opportunity for companies to quickly file a short period of account, to get the benefit of R&D tax credits, or to have the accounts approved by Directors and not file them publically (which is also permitted and will ensure that the R&D tax relief can be accessed).
Who can make a claim?
Broadly, an R&D claim can be made by companies seeking an advance in science or technology through the resolution of scientific or technological uncertainties. Obvious examples might include pharmaceutical or software development companies; however, claims are increasingly being made in industries such as engineering, agriculture and construction.
How much can I claim?
There are two schemes under which a claim can be made:
- The SME scheme for small and medium-sized companies; and
- The R&D Expenditure Credit (RDEC) for large companies, including those being subcontracted to or receiving subsidies.
The tax benefit of claiming under the SME scheme is that a loss-making company can claim a cash repayment of up to 33% of the qualifying expenditure (this is reduced to approx. 10% under the RDEC scheme).
The tax saving for a profitable company is reduced to approx. £25 in every £100 spent under the SME scheme (or nearly £10 out of every £100 spent with the RDEC).
A loss-making company with £1,000,000 of qualifying expenditure could claim a tax credit (repayment) of £333,500 under the SME scheme or £97,200 under the RDEC scheme.
This post was written by Gemma Thake, Senior Tax Manager at Price Bailey. If you have any questions on the above or are considering making a claim, please contact your usual Price Bailey point of contact or Gemma using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.