By Nigel Holmes, Head of R&D Technical Operations at Catax.
This regular blog has provided many tips and ideas in the past on how to maximise your Research & Development (R&D) tax relief claim, today’s blog in many ways is the opposite as we cover some of the reasons an R&D tax relief claim either fails or is not maximised.
This list is not exhaustive but summarises some of the key issues we come across quite regularly.
- The wrong accounting treatment is used. R&D tax relief claims can only be made for qualifying costs that are revenue expenses. This means they must have been expensed during the period and not capitalised. In 2005 this rule was relaxed to allow cost capitalised as Intangible Assets to also qualify. However, costs allocated to Tangible Assets will not qualify for R&D tax relief.
- Another issue we see less frequently is where subcontractor services are provided but rather than being invoiced in order to incur a cost, an alternative charge is offered such as a reduction in a future sales price, a royalty or even shares in the company. This may be the best commercial decision but it will prevent the subcontractors time being reflected in the R&D tax relief claim.
- We continue to inform those in receipt of grant funding that a grant does not preclude an R&D tax relief claim but it may result in the claim falling into the less generous RDEC scheme used by larger corporates. This can often disappoint those claiming the relief because an RDEC claim does not allow subcontractor costs to be claimed where the subcontractors are a company (which they usually are). Companies heavily reliant on subcontractors for their R&D should really weigh the pros and cons of using grant funding prior to applying for the grant.
- Staff who take little or no salary will not have a qualifying cost to gross up for the extra relief. Whilst it may be commercially beneficial not to draw a salary during the very early stages of R&D for smaller entities it will reduce the amount that can be claimed. Remember dividends do not qualify either, it may be better taking salary instead but tax advice should be taken before altering your remuneration structure. This factor will become even more prevalent in April 2020 when HMRC introduce the PAYE cap for loss-making companies.
- A quirk in the qualifying cost rules allows reimbursed expenses that relate to the R&D to be claimed (such as travel costs) but not where such costs are paid directly by the employing company.
- As the relief is only available to entities subject to Corporation Tax, sole traders or partnerships may wish to consider incorporating, otherwise, they cannot claim. Once again, there may be valid commercial reasons why not to incorporate.
- Similarly, we have seen times where costs are incurred as an individual even though there is a company in situ. Ensure the accounting entries are correct such that the costs are through the company’s books whether or not it is trading. A claim can still be made for pre-trading companies.
So, there are many pitfalls to be aware of, these are just some of them. If anyone wants to discuss a particular set of circumstances please get in touch.
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