What could make you feel better than free money, literally a cash deposit into your bank account? Well, for many it is when the free money comes from the taxman! Believe it or not, if you have been developing a new product, working on a novel service or writing a new piece of software then you may be able to claim back part of the costs you have invested from HMRC as an R&D Tax Credit.
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To be eligible, you have to show that the projects seeks to lead to an advance in a field of science and technology (not just for the claimant company themselves) through the resolution of a technological / scientific uncertainty that is not obvious to a competent professional in the field. The project must therefore have an element of risk (it can’t be certain that it will work), but if you can meet this criteria it is worth investigating further.
Companies claim retrospectively at the end of their tax year as part of their CT600 corporation tax filing. Claims can be made for costs incurred in the past 2-3 years depending upon the date of the company’s accounting year-end and can be claimed against a whole range of items including staff time (salary and pension but not dividends), subcontractor costs (in certain circumstances), externally provided worker costs, consumable materials used in R&D, software licenses and a proportion of energy costs where such costs were required for the R&D (not commercial exploitation) aspects of the project. It is possible to make a claim even if the project has been partially funded by a grant or in certain conditions by a customer.
Eligible project costs can either lead to a reduction in corporation tax liability (for profitable companies) or can lead to an increase in tax losses which can be surrendered for a cash rebate (loss making companies). That is to say you can actually get cash back into your bank account from HMRC! You do have to have spent the money on the R&D project first and then claim it back, although there are a handful of companies that will give a short-term loan advance based on a pending R&D claim submission. Pre-incorporation costs can also sometimes be included.
The actual amount you can claim can vary quite widely (between 7% and 33% of your R&D costs) and the rules are complex. Some of the things that affect the amount reclaimable include the company’s profitability, the project cost, whether grants are involve or whether paid for by the client out of profits, and the nature of the project R&D expenditure. When applying you also need to demonstrate the technical risk and this is normally achieved through the submission of an accompanying technical report describing the R&D project undertaken in a style which meets HMRC’s eligibility criteria.
The issue, if there is one, with R&D tax credit claims is that they are complex and you really need specialist help. Unfortunately, general accountants lack the technical expertise to prepare the technical reports supporting the R&D claim. Even if you avoid the HMRC sanctions a professional advisor is likely to be able to maximise the amount returned whereas if a non-specialist accountant is used you are likely to leave money on the table. A good R&D tax specialist advisor can be invaluable especially in complex claims (e.g. software claims are especially hard to differentiate between qualifying R&D and non-qualifying routine commercial software development) however it is advisable to discuss first with the technical analyst who would be preparing the technical report to ensure that they have relevant experience in your industry.
In recent years a large number of advisors have popped up, offering their services on a no win no fee basis. If the advisor is unable to secure you a tax rebate (or cash back) then they do not get paid and the advisors are motivated to maximise the amount successfully claimed. It is also advisable to select an advisor who is regulated to provide taxation advice (by for example the ICAEW or Chartered Institute of Taxation) as sadly many unregulated advisors encourage companies to make claims when their project does not meet HMRC’s criteria and this can result in not only the claim being rejected but the claimant company facing HMRC penalties.
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