The ins and outs of what is and isn’t eligible expenditure can be very confusing. There are many things you can do that can result in expenditure that could have been eligible being lost. It is essential to try to consider R&D ahead of time. This allows you to increase your R&D claim, as you can claim back up to 33p for every £1 of qualifying expenditure spent on qualifying R&D. For innovative companies that invest in R&D, it is vital that an R&D claim is considered ahead as early as you can, as small things often compound.
With that being said we here at Inovasi thought it would be useful to give a list of our 7 top tips for increasing an R&D tax credit claim
1 - Directors, to salary or not to salary?
If a director spends their time on the R&D project at a company but does not take a salary, then their time and effort are lost, in terms of an R&D claim. While taking mostly dividends can have tax benefits for the director, you cannot claim for dividend payments. If a director spends most of their time in R&D and they are paid a salary, they can get up to 33% of these costs back in an R&D claim. So, in some situations, it can make more sense to pay yourself a salary. This is something that has to be carefully considered as in some cases it does not make sense for the company or director to do this.
2 – Subcontracting… stay on the winning side of R&D for subcontracting/subcontractors
Subcontracting work and being a subcontractor is a very grey area when it comes to R&D tax claims, there can be a lot of debate about who actually carried out the R&D and has the right to claim. While the party that retains the IP is an indicator of who has the R&D claim it is not definitive. Regardless of whether your company is subcontracted or uses subcontractors, where the commercial facts align, you should be putting in the processes that make it clear the R&D is yours to claim. To do this you should make it clear in writing.
A) For companies subcontracting – When subcontracting work to another company make it clear in the contract that you are paying this company to conduct R&D for your company. In this scenario, you will then be able to claim up to 65% of the cost of the subcontractor.
B) For the subcontractor – When a company contracts you to do work you should make it clear in the contract that any R&D required and IP developed will be at your risk/reward, retained by you to be exploited in other areas beyond this one-off project. In this scenario, you may be able to claim for the non-funded expenditures you incurred for the R&D you did.
3 – Don’t let grant funding hold you back
Grant funding is a great opportunity for every company that is conducting a project worthy of receiving it. While it is a common misconception that you can’t claim R&D if you get a grant (as, depending on the grant, when done right you 100% can) they do have a very complicated relationship.
In short, if you get a non-project-specific grant that is notified state aid you can reduce your whole R&D for that claim period from being up to 33p for every £1 spent on qualifying R&D under the SME scheme and up to 11p for every £1 spent on qualifying R&D under then RDEC scheme. Whereas with a project-specific grant that is still state aid (but not notified), you can claim under the RDEC scheme and the SME scheme for different parts. Also, this leaves any other R&D outside of this project eligible for the SME scheme.
4 – Not missing out on staff expenses
Reimbursed expenses do make-up part of the staffing costs in an R&D claim. For them to qualify for R&D the expense must initially be on the employee i.e not on a company credit card. Once the cost to the employee is reimbursed if the expense is related to R&D activities then it can be considered a qualifying expenditure.
5 – Retaining SME status for tax purposes
As shown above, the SME scheme is extremely useful, and compared to the RDEC scheme you can get back up to 3x the amount. Given this, it is important that as an SME you carefully consider the things that could result in you being disqualified from SME status under the R&D scheme. The most common way this can be affected in most SME’s is with any other significant shareholders, or if a director is a significant shareholder in other companies.
If any party or person has a significant share hold (25%+) in the company and other companies the figures of the “group” must be combined to determine SME status. For R&D purposes if the total of the group exceeds SME status, every company in the group forfeits the SME status for R&D. These figures being having less than 500 employees and either turnover of less than €100 million or net assets of less than €86 million.
6 – Keep Track of employee times
If you take one thing away from this post it should be this one, this is probably the single biggest thing you can do to increase an R&D claim as well as support that claim. Employee costs are almost always the largest part of an R&D claim. So, if anyone at your company spends time on an R&D project write it down. It doesn’t really matter how you do it, find something that best fits the processes you already have in place, but please, record it somewhere regularly.
7 – Separate rent from heating and lighting
Heating and lighting are considered a consumable cost, which therefore means it is a qualifying expenditure. The rent however cannot be claimed. To claim for the portion of heating and lighting used in the R&D process the rent must be charged separately from the other bills. A simple one but it all adds up.
There are a lot of small tricks and best practices when it comes to R&D Tax, and as you’ve probably seen it is never simple. This is why at Inovasi we can help you to navigate these pitfalls and ensure your claim is fully maximised. On top of this, we make sure that your claim ticks all of HMRC's legislation and can stand up to any scrutiny.
Get in touch to see if we can help your business.