How To Forecast Your R&D Tax Claim
When R&D tax relief first fell onto your radar, you were no doubt blown away by the generous benefit of up to £33 back for every £100 you invest in R&D. But the truth is – as you may have already experienced - for R&D projects, the amount you can claim ranges anywhere from 0 to 33%, depending on several factors.
As a business that is investing in research and development activity, and making R&D tax relief claims, it’s important for you to have as much certainty over your R&D claim, as early as possible, even as early as the planning phase. But why?
Well, an R&D claim only gets you money back for costs you have already incurred. This means you’re not going to get any benefit from the investment until at least a year or so down the line, or if you're with a good accountant (cough cough), several months.
Getting a better understanding of what will qualify before the project, allows for a more accurate estimate of the true cost of the investment, at the outset. At the front of the project this enables more accurate budgeting for the time and resource invested. At the back of the project when the claim comes to realisation, this enables more accurate cashflow forecasting so you can plan for any potential future investment.
So, what is the true cost of my R&D?
To get a better understanding of the true cost of your R&D investment, there are three big questions you need to be able to answer BEFORE you kickstart your next R&D project:
- Is it even an R&D project?
- What qualifying activity can I claim for?
- What R&D rate should be applied to the qualifying activity?
Let’s take a look at each of these questions in a little more detail….
1. Is it even an R&D project?
You’ve got to get past this hurdle first and believe us when we say, we still work with businesses that misidentify R&D projects all the time. To be on the safe side it is best to keep a record of all projects that you think will qualify and check it out with your R&D adviser if you are unsure.
So, how do you know if your project is eligible?
Well, to be eligible, an R&D Project must be:
Making a considerable improvement to existing technology. This doesn’t always mean it needs to be ground-breaking work. If you are working to overcome technical uncertainties in order make your products, services or processes, faster, less expensive, or better in some way, the project may be eligible for R&D tax relief.
Overcoming technological challenges, where the solution is not readily apparent to a qualified or experienced professional in their field of technology.
If it’s an R&D project, then it goes on the list, and you need to determine what costs you’ll be able to claim.
2. What qualifying activity can I claim costs for?
To qualify, R&D activity must fall into one of the below categories:
- Staff costs
You can include the salaries, pensions and NIC of staff who are directly involved in the R&D project.
- Reimbursed expenses paid to employees or directors on R&D travel
You can include reimbursed expenses claimed by employees or directors on travel related to the R&D project.
- Outsourced subcontractors or freelancers
You can include 65% of the costs paid for "unconnected" subcontractors (under the SME R&D scheme).
- Materials for prototype builds
You can include the cost of the materials required for designing and constructing a prototype which will not be sold.
- Ancillaries - utilities, software licences
You can include an appropriate proportion of utilities and software costs used in your R&D projects.
Unfortunately it’s not always black and white, and knowing whether the activity ACTUALLY fits into a qualifying category can throw up some tricky red herrings.
Here’s a couple to keep an eye out for:
Software and Hosting….
Now this one is a little different.
Software licences can be claimed however hosting costs on their own do not fit into a qualifying category of R&D. This can be frustrating as businesses often incur large hosting costs used purely for R&D, so feel they should be included…but currently they aren’t.
Having said that, hosting can often include a lot of services, and depending on how the company uses them, there is the possibility they could be eligible under the software licence header. As you can see, this area is complex and your R&D provider would need to look into this for you, to help apportion the amount linked to a qualifying category.
Storage, telecom and data costs are just out of the game, they do not qualify.
Time allocation for employees involved in R&D projects will often be one of your biggest costs, and so it is vital to apportion everyone’s time as accurately as possible to get better certainty over your R&D claim. Record time spent by those directors, employees, qualified staff working on the R&D project.
It’s also important to make sure you are including staff costs for all indirect qualifying activity. This includes roles of support staff where they are engaged in activities such as finance and HR, that indirectly support an R&D project.
3. What R&D rate should be applied to the qualifying activity?
So now we know the project is eligible, and the different qualifying categories the activity must slot into (including the nuances), we want to know the R&D rate that can be applied to the activities.
There are three main factors that could impact the amount of the costs incurred that you can actually claim back:
R&D SME Scheme vs. RDEC Scheme
Depending on which scheme you are claiming under, this can significantly impact the rate you can claim.
- RDEC SCHEME: Following the 2021 Budget, RDEC increased to a 13% tax credit for expenditure incurred on or after 1 April 2020. As RDEC is subject to corporation tax, the net of cash benefit is currently 10.53%
- SME SCHEME: The SME R&D Scheme is currently an additional 130% tax deduction for qualifying expenditure. So this equates to a 24.7% cash benefit for profitable companies, and up to 33.35% cash benefit for loss making companies that can claim the SME “tax credit”. Also note that following the 2021 Budget, SME tax credit claims are now subject to an annual cap of £20k plus 300% of the company’s PAYE and National Insurance Contributions liability.
The other major difference with the RDEC scheme is that you cannot claim for costs paid to limited company subcontractors.
Subcontracting vs. Inhouse
If your business subcontracts R&D work to a third party subcontractor (unconnected to your company) – you will still be able to claim for some qualifying costs but the relief may only be 65% of those costs.
NOTE. If you have taken on subcontracted R&D work to your business, you might not be able to claim R&D tax relief at all, or the only route available to you is under the RDEC scheme – reducing your claim to 10.53% of the qualifying expenditure.
Profit Position vs. Loss Position
The upfront cashflow benefit is actually greater for loss-making SMEs. Here’s a look at the how this affects the rates:
Loss: If you’re going to be in a loss position, then HMRC will make a cash payment to you of up to 33.35p for every £1 spent on R&D activities.
Profit: If you’re going to be in a profit position then HMRC will make a cash payment to you (or offset against your corporation bill) of up to 24.7p for every £1 spent on R&D activities.
Then timings come into play….
Loss: If your company is going to make a loss, you can make the claim as soon as your accounts are prepared and ready for filing.
Profit: If your company is likely to be profitable, it’s a little different. The biggest benefit will come by reducing the tax bill which is due nine months after your year end.
R&D for Financial Forecasting
As you can see there’s actually a lot to consider when it comes to forecasting your R&D claim. Any steps taken towards getting a more accurate idea of your R&D claim in advance of the project are worthwhile.
If you are a business that is already claiming R&D tax relief, you should be able to retrospectively use the information from your previous claims to help you navigate some of the more challenging nuances of R&D tax relief.
THINK YOU MIGHT BE ELIGIBLE TO CLAIM?
If you think you might be eligible to claim R&D Tax Relief, or you’d like to discuss your R&D claim with us, please get started here or call 020 8187 4201.
This article was written for Construction Insider and Saint Financial Group. Saint is a multidisciplinary group based in the UK that helps construction businesses develop and grow. SaintFG offers a range of quality solutions in supporting businesses.
Saint provides the luxury of free business consultancy for all of our clients, call now for your free consultation with a friendly business advisor to discuss your burning questions and put that energy back into your business!