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Does Size Really Matter?

Business Tips, R & D Tax Credit, Uncategorized

When it comes to R&D tax claims, being aware of the size category your company falls under is vitally important.

Many UK companies may want to appear bigger than they are, in the hope it attracts more business. However, when it comes to R&D tax claims, it is quite the opposite.

Your company size can greatly affect the amount you can claim via R&D tax credits. It can be quite complicated too, if you do not know what to look out for, and HMRC can potentially penalise you if you get it wrong on the application.

To ensure this doesn’t happen, our experts have outlined a few key factors in relation to company size to think about when applying for R&D tax credits.

What are the two types of R&D tax available?

Before delving into detail about what HMRC looks for when assessing the size of a company, it is worth noting why size matters.

There are two categories of R&D tax credits available. The Small and Medium Enterprise (SME) relief, and the large company relief, also known as the Research and Development Expenditure Credit (RDEC). Let’s look at the SME relief first.

SME Relief

This is the more generous of the two categories. R&D tax credits are calculated based on the company’s research and development spend. To make an R&D credit calculation, you need to identify qualifying expenditure and enhance it by the relevant rate.

The SME R&D tax relief allows companies who qualify to:

deduct an extra 130% of their qualifying expenditure from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction
claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss

As of January 2019, SMEs are able to claim up to 33p for every £1 spent on qualifying R&D activities. This is potentially a huge amount for many SMEs, highlighted by the fact that the average SME tax credit claim is approximately £62,000. This is not an amount to be ignored in today’s current financial climate.

Large Company Relief – RDEC

If you are large company, the relief is a little less generous. The RDEC rate is 12%, however, because the RDEC rate is paid net of Corporation Tax, the effective rate your large company can receive is worth 10p for every £1 spent.

Similar to the SME relief, the credit is offset against the company’s tax liability or, in some circumstances, is payable in cash.

According to the latest Government statistics, the average value of large company R&D tax credit claim was approximately £343,000.

To sum up the two categories, we have noted down the figures in a table below.

What is the definition of an SME in relation to R&D tax?

The Government has set clear guidelines in relation to which companies qualify for which category. However, these guidelines can become confusing if all factors are not considered.

HMRC define a large company as either having:

More than 500 employees
An annual turnover of €100 million or;
A balance sheet total under €86m

There are a few factors to bear in mind here, however. The 500 employees, for example, are classed as FTE (full-time equivalent). This means that there are two types of employees that do not contribute to the total count:

Employees on maternity or paternity leave
Apprentices

With the increase of apprenticeships over the last 15 years, it is worth noting this down as they could make up a significant part of your workforce, and this could have an impact on the amount of R&D tax relief you can claim.

How do linked companies interact with R&D tax?

In addition to keeping an eye for the count of employees, it is also vitally important companies keep in mind any linked or partner companies. If your company has external investors, or is in a group, it is worth checking with an R&D tax expert whether it could affect your SME status.

If, for example, your company has more than 50% of the shareholders’ or members’ voting rights in another company, the data of that company needs to be added to the data from the company putting in the R&D tax claim.

In addition to this, if 25% of the company is owned by another entity, or if the company in question owns 25% of another, it is classed as a partner company which can also complicate matters.

We often see SMEs fall foul of this particular aspect of R&D tax credits. If you are unsure about your status, our advice would be to double check with an expert before putting in a claim.

Is my company qualifying for R&D tax credits?

Once you’ve worked out which category you fall under, you will need to investigate if the work you are doing actually falls under the required qualifying activity criteria.

The government has set out some guidelines to help companies. These are:

Qualifying Activity:

Creating new products, processes or services.
Changing or modifying an existing product, process or service.
Activities aimed at obtaining new knowledge.
The search for alternatives for materials, devices, products, processes, systems or services.

If your business is undertaking R&D activity in relation to a specific project (even if the project is unsuccessful in the end) and the R&D activity meets the above definition of qualifying R&D, then you could be eligible for this additional tax relief.

We often come across many companies who carry out eligible R&D activities without realising that their work qualifies for this little known tax relief.

How can RDTaxCredit.org.uk help?

RDTaxCredit.org.uk understand that the process of claiming R&D tax credits can be a little complicated. That’s why we have industry experts who can guide you through the process, step-by-step, to ensure that you can claim as much tax relief as you possibly can.

We can determine whether you are an SME or large company under the government’s rules, and ensure that there are no problems or mistakes with the application.

Our experts help companies across all sectors with claiming R&D relief, leaving them with more cash to re-invest into their business. We have of experience in dealing with many SMEs and large companies across the UK.

We handle the R&D claim from start to finish and can produce the technical report on your behalf that helps R&D Tax inspectors understand your work and approve the claim more efficiently.

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

If you would like to contact one of our experts for free initial advice, complete the quick enquiry form to receive a no-obligation review of your R&D Tax Relief claim.

March 23, 2019/0 Comments/by Samantha Holloway

New Cap for SME payable R&D Tax Credit Claims

Business Tips, News, R & D Tax Credit

New cap for SME payable R&D tax credit claims – All your questions answered

Will your SME be affected and, if so, how can you prepare for the new cap?

For companies relying on R&D tax credits it was a mixed 2018 Budget day. Chancellor Phillip Hammond announced the government’s pledge to raise the total R&D investment to 2.4% of GDP by 2027. The Budget report also shouted about an extra £1.6bn for its modern industrial strategy, ensuring that British companies stay at the forefront of world-leading industry.

However, with the good news came the sting of a new cap for payable R&D tax credits. This came in the form of a PAYE and NIC restriction surrounding the amount that can be claimed. Below, we guide you through all of the potential questions UK SMEs may have in relation to what the cap means for them.

What is the new cap to payable R&D Tax Credits?

A change in legislation was announced which will see the Government reintroduce a cap on the SME payable R&D tax credits. The cap relates to the PAYE and NIC paid by SMEs within a claimable period.

The proposal states it will introduce a cap of 300% (or three times) the company’s total PAYE/NIC payment for the period.

Before 2012, however, the Government were not so lenient and you could not claim R&D tax credits if you had paid no PAYE or NIC. This was abolished after 2012, with the government now reintroducing the policy with the added three times PAYE/NIC leniency.

Why has the new cap to R&D Tax Credits been introduced?

The PAYE/NIC cap has been introduced to ensure businesses are acting legitimately and to guarantee the tax relief is fulfilling its intended purpose.

It has been positioned by the government as an anti-fraud measure. HMRC uncovered a total of £300m in fraudulent claims by “artificial corporate structures”. This was occurring where structures had been set up to claim the payable tax credit despite having little or no employment or activity in the UK.

Who will be affected by the cap on R&D Tax Credits?

The most likely to be affected by this cap are SMEs who are in the early stages of their life. Generally speaking, start-ups do not employ many employees and often use contract workforces for projects.

Those who do not have permanent employees will not be paying as much as PAYE/NIC as those who do. Companies that are flexible in relation to employment, who use different skill sets for different projects, and are heavily weighted towards third-party costs rather than salaried staff, are the most likely to be hit by the cap.

The Treasury has stated that close to 95% of companies currently claiming the payable credit will be unaffected. However, consultations are to be carried to both confirm that is true and to ensure the impacts are minimised.

How will the new cap to R&D Tax Credits affect SMEs?

Essentially, after the change, an SME’s salary bill will affect the value of its R&D Tax Credit claim. SMEs will have to think about how they resource their business, as it could have an impact on the value of the payable credit.

SMEs will need to reassess their ratio of costs to ensure they are paying enough PAYE/NIC to claim payable credit. They will need to weigh up the pros and cons of the personal tax efficiencies versus the benefits of the business paying salaries and then receiving cash credit.

It is also worth bearing in mind that the cap will only apply to claims for payable tax credit, and will not affect the calculation of the enhanced R&D expenditure.

What are payable tax credits?

Understandably, not everyone understands the ins and outs of payable and non-payable tax credits, so we have a simple explanation below:

Payable tax credits

These are also known as non-wastable, or refundable tax credits. They are not limited and can exceed the value of any tax liability, including a liability of zero. This means they can exceed any tax debt, and can also be paid directly to an individual or company in cash. This type of credit is solely what the new cap relates to.

Non-payable tax credits

These are also known as wastable, or non-refundable tax credits. They are limited in value to the value of your tax liability. Therefore, these tax credits can only ever be granted to individuals or companies with tax liability (a tax debt).

Tax liability

A tax liability is the total amount of tax debt owed by an individual, corporation or other entity to a taxing authority, like HRMC.

When will the new cap on payable R&D Tax Credits come into place?

With this being a relatively big change in how R&D Tax Credits are claimed, the government has factored in time for consultation.

The initial proposal sees the cap starting on or after 1^stApril 2020, which should give HMRC enough time to minimise disruption.

This also gives SMEs enough time to prepare and act now in anticipation of the coming changes.

How can RDTaxCredit.org.uk help?

The proposed changes are significant and will fundamentally change how SMEs apply for R&D Tax Credits. By discussing these issues now, SMEs can be better prepared to reduce any potential changes to cash flow.

RDTaxCredit.org.uk can add real value here. We can advise on how to take action now in order to protect your SME payable R&D tax credit. Now, more than ever, it is vitally important SMEs understand what they can claim for, the process of the R&D tax credit claim, and all of the pitfalls many SMEs encounter while applying.

Our expert team of accountants are committed to working with you and your company to provide strategic R&D tax credit advice in the wake of these changes. We can review how it may affect your claim and propose new techniques to ensure you claim the maximum amount you are entitled to.

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.

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.

January 26, 2019/0 Comments/by Samantha Holloway

UK SMEs owed £84Bn in R&D tax relief by Treasury

Business Tips, R & D Tax Credit

Research shows the government is sitting on billions in unclaimed tax relief.

Research into R&D tax credits for SMEs has shown that only around 1% of UK small to medium businesses have ever claimed the relief.

With SMEs not claiming what they are entitled to, the Chancellor of the Exchequer is sitting on an SME goldmine worth £84.2bn, data suggests. To put this into perspective, this is approximately twice the annual budget of the Ministry of Defence, and enough money to run the NHS for eight months.

What is the R&D Tax Relief?

The simple reason the tax relief is not being claimed is due to the lack of education around the tax break. Experts within the industry believe it has been advertised by the government to UK SMEs poorly.

R&D tax credits were created in 2000 by the government as an incentive for UK companies to invest in research & development. A staggering £21.4bn has been claimed in tax relief since then, in the form of 240,000 claims.

These tax credits were put in place to encourage innovation, in order to ensure the UK can compete with the biggest global superpowers. The tax relief can help reduce a company’s corporation tax bill, or can be claimed as a cash sum reimbursement from the HMRC.

Companies can claim relief on research and development costs in relation to, in the government’s words, “a project that seeks to achieve an advance in overall knowledge or capability in a field of science or technology”.

However, this is slightly misleading, as the companies in question do not need to be researching brain surgery or creating a new jet engine. Companies can claim relief on a whole host of research and development projects, including a new recipe for beer, hazardous substance management, an engineering process, or new processes for web development.

How many UK SMEs are missing out on R&D Tax Relief?

There are approximately 3.5million SMEs actively trading in the UK, with 57% of them eligible for R&D tax credits. Of the 57% eligible, only 1% have ever claimed the relief.

This means that approximately a staggering 1.97million SMEs are potentially owed tax relief.

The trend in uptake, however, is positive. For 2016-17, 39,960 R&D tax credit claims were made, with over 34,000 of these being made in the SME R&D scheme. This figure is still incomplete, however, due to the delay in reporting. This figure is expected to rise, meaning the full amount will equal the highest ever tally in the 18 years since the tax relief initiative has been in place.

How much is the R&D Tax Relief worth to SMEs?

The fact that only 1% of those eligible are claiming the tax relief is even more astounding when you factor in the average claim for SMEs. Reports suggest that the average claim for UK SMEs for R&D tax relief hovers around £43,000 – £62,000.

The claim can also be backdated by up to three years, meaning if SMEs have already taken part in research and development, they could be sitting on extra cash.

These figures are incredible when thinking about the current business climate and the headwinds many companies face in today’s market. £50,000 is an amount which would be invaluable to any business.

How can rdtaxcredit.org.uk help?

There were nearly 7,000 first time applicants last year, and if your company was not one of them, your competitor may well have been. These were UK SMEs in a whole range of sectors, actively involved in R&D, investing time and cash on improving products and services, and being subsidised by the government to do so.

At rdtaxcredit.org.uk, we are helping many SMEs to understand this little known tax relief better. While we believe the government needs to do more to educate businesses in relation to R&D tax credits, our experts are also providing SMEs with information, and guiding them through the step-by-step process.

We are also educating SMEs that are aware of the tax relief, but are simply not getting the most out of it. Some are underclaiming due to a lack of comprehensive understanding about some of the subtle details of the R&D guidelines. In addition to this, some SME owners believe R&D Tax Credits are only available for traditional research sectors.

Many SME owners that we have come across simply think the tax relief is too good to be true, and there must be a catch. This is leading to many company owners missing out on this legitimate financial reward for their valuable investment within their industry.

Get in touch for advice

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.

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.

January 14, 2019/0 Comments/by Samantha Holloway

How will Brexit affect R&D Tax Credits?

Brexit, R & D Tax Credit

Will the Government incentive for research and development be affected after Brexit is invoked next March?

It seems to be the word on everyone’s lips – Brexit. And rightly so, as many companies are gearing up for a brand new world outside of the European Union after 29 March 2019.

Opinion is still split, but early indications are predicting a turbulent time for UK business. Data analysis by Magic Circle law firm, Clifford Chance, has suggested that automotive, agriculture, food and drink, and chemicals and plastic industries will be hit the hardest, with tariff and non-tariff costs reaching up to £27bn for exporters.

This means now, more than ever, companies need to be astute in regards to financial planning, including tax planning.

With this in mind, Brexit is an area we have been asked about a lot, as many companies are concerned that the R&D Tax Credits they have come to benefit from will be taken away, or reduced. Below, we discuss this matter and try to ease any fears.

Does the EU have anything to do with R&D Tax Credits?

R&D tax relief is a UK Government-run incentive, so on the face of it you would assume that the EU do not have any power in relation to the tax relief. However, R&D tax relief comprises of two separate schemes running parallel to one another.

The first is the RDEC, or the Research and Development Credit scheme, formerly known as the Large Companies Scheme. This scheme is aimed at larger companies, with more than 500 employees and a turnover more than €100 million (or a balance sheet more than €86 million).

The second is the SME scheme, which to the UK is far more lucrative than the RDEC scheme due to the amount of businesses that fall into this category. This scheme is regulated by the EU, operating under what is known as the State Aid rules.

State Aid legislation ensures that EU members do not assist companies over a certain amount, in order to avoid potentially distorting competition among member states. It is a cap that ensures no EU member obtains an unfair advantage by subsiding R&D tax relief more than an agreed amount.

After Brexit, the UK Government will be free from EU regulation in relation to a subsidy limit, meaning this cap will be potentially removed. If this is the case, our prediction is that R&D tax relief would be a massively important element of the UK’s R&D policy, particularly in relation to SMEs.

Will R&D Credits still exist after Brexit?

It is hard to talk in absolute certainties in relation to anything Brexit related, so we will tread carefully here.

However, from the impression we are receiving from the UK government, and going off past policies in relation to R&D, we can deduce a number of positives. Theresa May’s post-Brexit government has already recognised the importance of stimulating business in the UK through R&D grants. In fact, their own studies have suggested that £1 of R&D tax relief leads to £1.53 – £2.35 back in expenditure, stimulating the UK economy, whilst fuelling innovation.

The government also showed their willingness to support R&D tax relief in 2012 when it lifted the cap on payable tax credits. It also demonstrated a commitment to the tax relief in last year’s Autumn Statement when it increased the RDEC tax relief from 11% to 12% for qualifying expenditure incurred after 1 January 2018.

The most recent budget saw positive steps too, with the government committed to raising the total R&D investment to 2.4% of GDP by 2027, a reported extra £1.6bn.

So, from the general attitude towards R&D tax credits from the UK government, we can deduce that a post-Brexit UK will still see this government incentive thrive.

What can my business do before Brexit?

While we would like to know what a post-Brexit Britain looks like, none of us have a crystal ball. A lack of the details in relation to no-deal, hard and soft Brexit, can leave hard-working companies in the UK left in the dark a little in regards to what their next steps are.

Our advice is this – in the uncertainty of Brexit it is now more than ever companies need to be prudent with their tax relief efforts. We can predict with a fair amount of certainty that R&D tax credits will exist after 29 March 2019, meaning that companies should be thinking now about their tax relief.

We will believe the R&D tax funding system will remain healthy, with more and more businesses applying for relief – an average of £53,000 per claim.

How can rdtaxcredit.org.uk help?

At rdtaxcredit.org.uk, we understand that Brexit can be a minefield to even begin to think about. Add the idea of claiming R&D Tax Credits, and all seems a little daunting.

However, we want to help you through this process, to ensure you receive the financial reward that the UK Government wants to give you.

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

If you would like to contact one of our experts for free initial advice, complete the quick enquiry form to receive a no-obligation review of your R & D Tax Relief claim.

November 8, 2018/0 Comments/by admin

Posts

Will the Government incentive for research and development be affected after Brexit is invoked next March?

Does the EU have anything to do with R&D Tax Credits?

Will R&D Credits still exist after Brexit?

What can my business do before Brexit?

How can rdtaxcredit.org.uk help?

If you would like to contact one of our experts for free initial advice, complete the quick enquiry form to receive a no-obligation review of your R & D Tax Relief claim.

Any questions? Get in touch today on 0161 531 0007.