The lucrative tax incentive can often be complex for many business owners. Ensure you don’t fall foul of these potential issues.
R&D tax credits have been helping UK businesses thrive in the research and development arena since 2000. Many businesses, large and small, have been granted tax relief by the UK government in order to fund their research, allowing the UK business community to continue to excel.
The intricacies of the R&D tax credits claim form, however, has left some businesses scratching their head. Minefields within the legislation mean that mistakes are often made unwittingly to otherwise perfect claims.
These pitfalls can be related to problems surrounding the long-term goals of the business, rather than the here-and-now of research and development, and can often throw up issues when linked to business operations or structural changes.
Here, we map out the most common issues to nip in the bud before putting in a claim, to ensure you get the most out of your R&D tax credit claim. Here are the most common mistakes we see:
Acquire, be acquired, or merge with another company during the claim
This is one we often see from growing SMEs, especially in sectors where change is fast-paced. Government regulations state that an SME involved in the R&D claim take account of companies connected through common ownership. Essentially, buying, or being bought, by another company may mean that the company in question is no longer an SME, failing to qualify for the SME part of the R&D fund. This stands true even if the company who has recently become involved in the SME simply purchases a significant shareholding.
In addition to this, when a company outgrows the status of SME naturally and becomes a large company, there is what the Government call “year of grace”. This means that the changes will not affect your company’s status until the conditions are met for two consecutive years. If, in that period, the company has met the threshold to hold the status of a large company, it will retain that status.
However, when a company acquires or is acquired and becomes large enough to be in the large company category, the “year of grace” leniency does not apply. This means that the company is considered to be a large company immediately, and for the entire year in which the purchase takes place, limiting the benefit available.
It is also worth nothing that, for R&D tax credit purposes, to be classed as an SME you must have fewer than 500 staff, and either:
- A turnover of no more than €100 million; or
- Gross assets of no more than €86 million.
Anything above this threshold means your company becomes a large company, and cannot apply for the SME fund. Large companies will then have to apply to use the RDEC fund, which is a little less lucrative:
- The SME R&D tax credit scheme is worth up to 33p for every pound spent on qualifying expenditure.
- RDEC, the research and development expenditure credit, is worth 10p for every pound spent on qualifying expenditure.
Move beyond SME status naturally
In much the same vein, we see companies naturally grow out of being an SME. Businesses are always evolving, and generally speaking, growth is positive. If the changes are natural in the company’s lifecycle, the “year of grace” does apply, giving you some time to think about how the change of status will affect any claims you may have.
Along with the lowering of generosity from 33p to 10p of every pound spent on qualifying expenditure, it is also worth nothing that R&D tax claims become a little more restricted in relation to subcontracted costs when a company becomes classed as large.
Move from loss to profit
Much like growing a company organically, moving from loss to profit is a positive outcome for business owners. However, it can have an affect on your R&D tax claim due to how tax losses and R&D reliefs interact.
A company that makes a loss in-year can receive an immediate cash benefit of up to 33% of its R&D expenditure, with a taxpaying company getting a cash benefit of around 25%. However, in the instance of a company that has seen losses for several years, the R&D claim can actually extend these losses, while deferring the actual cash benefit until future years. This needs to be recognised within an SME cashflow, where ready money is often a requirement.
Ordinarily, companies will be looking to make profit, and would sacrifice the research and development claim for the long-term survival of their business. However, any transition from loss to profit will need to be considered carefully, especially for those businesses who have been loss-making for a while as the relationship between tax losses and R&D relief is complex.
Pay directors large dividends rather than employment income
A tax adviser will tell directors of companies that dividend income is subject to a lower level of income tax than employment income. With the tax rates being lower, directors often opt to be paid in dividends rather than a full salary. This reduces their personal income tax burden, and is a well-known tool of tax planning.
In relation to R&D tax credits, however, dividends are not claimable as a cost of R&D. This can lead to potential issues where highly paid directors who partake in research and development are not contributing to the R&D relief due to their salary not being eligible.
This may be one to think about if part of your R&D tax credit claim involved numerous high paid directors that are receiving dividends rather than a salary.
An internal restructure
Restructuring a company can happen for a number of reasons, and the implications for an R&D claim are almost infinite and depend on the circumstances. If a company’s trade and assets are transferred to another business, for example, it could ordinarily claim for R&D carried out up to that point. However, if that company is then wound up, it is no longer able to make any claim under the SME category.
In addition to this, caution is advised where costs are internally transferred within a group of companies. Usually, these costs can be claimed within any of the companies involved, if each of their trades are subject to UK corporation tax. However, if there is ambiguity over what the recharge is for, it can be difficult to identify the correct company from which to make the R&D tax claim.
How can RDTaxCredit.org.uk help?
At RDTaxCredit.org.uk, we understand that beginning to think about claiming R&D Tax Credits may be a little daunting. We want to help you through the process, to ensure you receive the financial reward that the government wants to give you.
Our expert team of accountants are committed to working with you and your company to provide strategic R&D tax credit advice, to ensure you do not fall victim to any potential mistakes. We can review any company changes that may affect your claim and propose new techniques to ensure you claim the maximum amount you are entitled to.
We offer a friendly and professional approach to R&D Tax Credits which includes:
- A free no obligation initial review.
- 100% success rate
- 30 day quick turnaround
Contact one of our expert advisers today for a free initial review, and see if you can claim back some much needed tax relief.