Jonathan Wilson of Barnett & Turner explains the current system for tax credits and thinks business may benefit eventually from a more relaxed regime. There’s little doubt that Brexit has created a great deal of uncertainty. But whatever your view about the likely impact on business overall, there’s speculation that the decision to leave the EU might be good news from the point of view of R&D tax credits.
Under the state-aid rules drawn up by Europe, there are limits to how far governments can support industries with tax breaks. Some people glimpse a world of greater freedom and generosity once ties with Brussels are cut.
The background here is that over 22,000 companies submitted claims for R&D corporation tax relief in 2014-5, which is a 12% increase on the numbers recorded in the preceding tax year. So the tax break is certainly popular. What’s more, the total value of the expenditure across these companies was a whopping £21.8 billion.
Who can claim this relief?
You might think that it’s the province of, say, big pharmaceutical businesses, but that’s really not the case. Any company has been potentially able to qualify for a 130% extra corporation tax deduction after April 2015 (effectively 230% tax relief on qualifying costs).
To claim the relief you must have a qualifying project, which seeks to:
- Achieve an advance in overall knowledge in a particular field
- Resolve a scientific or technological uncertainty
The systematic approach must be documented by the company and, according to government guidelines, you must prove you are:
- Extending overall knowledge or capability in a field of technology
- Creating a process, material or device, product or service which incorporates or represents an increase in overall knowledge or capability
- Making an appreciable improvement to an existing process, material, device, product or service
What other criteria apply?
The technical challenges you face must be ones which can only be overcome by bespoke and unique methodologies. If there is already a standard solution in the public domain, then you won’t be able to claim. You also need show that you have taken a systematic, investigative and experimental approach to the problem – drawing on scientific knowledge and practical experience.
This may involve:
- A technical analysis and documentation of the requirements
- The specification of a solution
- Development of the solution against the documented requirements
- Implementation and integration of the solution
- Documentation of trials and tests to record actual behaviour against expected
- Correction of any significant deviations in behaviour
What costs count towards the claim?
Qualifying costs include those of staff, subcontracted staff, consumables and heat and light. You can also count the costs of software used directly in the R&D process. Remember that you will need to apportion staff time between the R&D and regular work.
Capital Expenditure
If you use plant and machinery capital expenditure solely for R&D, you will gain 100% writing down allowances.
How can HCWA help?
Firms in the HCWA association can:
- Ensure that you are maximising your claim
- Advise on the best option available if a choice arises between surrendering a loss or carrying it forward
- Ensure that the claim is valid (there can be particular difficulty in assessing whether consumables’ costs are qualifying expenditure)
- Assisting with the narrative of the accompanying R&D Report
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk