FAQs
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Here are some of our most frequently asked questions, however, if you can think of anything not listed, let us know as we would be happy to answer anything that you can think of.

Eligibility for R&D tax credit

No. Charities, universities, sole traders nor partnerships are able to claim under the R&D Tax Credits scheme. The entity claiming must be a corporate, liable to UK corporation tax. This would therefore include UK branches of overseas companies.
 

As long as the company has commenced trading and is a going concern then it can claim R&D tax credits. In fact a number of our clients are in the early stages of trading and do claim the R&D tax credit relief.

Yes, the overall success of a project is irrelevant in terms of making a claim. If anything a failure may be good in terms of showing the complexities of the R&D project.

Yes, as long as the project was ongoing during the claimable period and qualifying R&D activities were undertaken then a claim can be made. In fact, a claim may be made in the subsequent period if the project was still ongoing at that point. 

Yes, as long as the project was ongoing during the claimable period and qualifying R&D activities were undertaken then a claim can be made.

Yes, in fact many loss making companies receive repayments from R&D which can be a lifeline to them when cash flow is tight.  The claim is made by amending the tax return. Losses can be exchanged for a repayment at 14.5%, so can be very valuable to the company. 
 
The amount that can be surrendered is restricted to the loss relating to the R&D projects rather than the loss from general trading. 

It does not matter where the R&D activities were undertaken as long as they are qualifying activities then an R&D tax credit claim can be made.

A technological uncertainty is where your company is researching or developing something that is not known to be scientifically or technology feasible when you make or discover it.

This means that your company, or experts in the field, cannot already know about the advance or the way you achieved it. This includes where an idea of how the uncertainty may be resolved but you have to go through a process of trial and experimentation to test the idea and prove whether or not the idea is feasible.

There is no set percentage or measure to determine whether or not an improvement meets the appreciable test.  Each project will need to be considered on its own merits. However the improvement cannot be merely superficial, cosmetic or an itinerant improvement.

The improvement can be any improvement such as efficiency, selling cost or cost of production.

The projects have to be assessed individually to see if they qualify. They must involve the development of a new or appreciably improved product or process and show an element of technological uncertainty.

Patent Box

Yes, you can! The R&D and Patent Box schemes are designed to work in conjunction, so you may be able to claim R&D relief based on expenditure incurred and Patent Box relief based on income derived from IP.

Yes! As long as you have contributed to the development of the product and receive a licencing income or royalties from your IP rights, you can make a claim for Patent Box relief.

Luckily the Patent Box regime applies to UK companies (not sole traders etc.) which meet the following criteria:

  • The company holds a qualifying IP right or an exclusive licence for a qualifying IP right
  • The company has significantly contributed towards the development of the invention either during or post creation
  • The company has performed a significant amount of the active management of the IP rights held (i.e. the IP isn’t held in a passive holding company)

If your company makes one product, then you only need to have one component of that product with an IP right in order to make a claim. Having additional IP rights will not impact the level of relief.
If your company has income relating to more than one product, then as long as there is a qualifying IP right, as described above, then the income relating to each relevant product can be included in the claim.

The legislation is undoubtedly complex, but that is where Fiscale can help. We will work with you and your accountants to gather the relevant information and then prepare the calculations on your behalf. As we work on a fixed percentage of the tax benefit arising, if you don’t receive any benefit, it won’t cost you a penny.

Fortunately, the Patent Box scheme covers more than just patents registered in the UK. It is intended to cover the following IP categories:

  • A patent granted by the UK Intellectual Property Office
  • A patent granted by the European Patent Office
  • A patent granted under the law of a specified European Economic Area State
  • A patent application that would have complied with the requirements of the Patent Act 1977 but was not granted due to reasons of national security

Rights similar to patents are also covered by the scheme:

  • Plant variety rights
  • Marketing or data protection rights for human or veterinary medicines, plant breeding or plant varieties

This is a more complex area and will differ based on the facts of each scenario. Fundamentally a Patent Box claim must be made on IP held by the company making the claim. However, where IP is shared, calculations must be made which remove the percentage of profits owned by the other company.

There are five types of income which can qualify for relief.

  • Sales of items which are either patented or incorporate components with IP rights
  • Licence and royalty income
  • Sales of IP rights
  • Damages received by the company in respect of an infringement, or alleged infringement of IP rights
  • Damages, insurance or compensation received by the company in respect of a loss of relevant income

The Patent Box is an HMRC approved tax relief scheme which was introduced in 2013 to encourage innovation in the UK. The scheme taxes profits attributed to qualifying intellectual property (IP) at a lower corporation tax rate of only 10%, as opposed to the current rate of 19%, giving qualifying companies a considerable boost to their finances.

Payment of R&D tax credit

HMRC normally take 28 days to process a claim, with any subsequent repayment normally being released within 14 days. This period may be extended if HMRC open an enquiry. 

There is no choice in the offset. The R&D Tax Credits is a deduction in calculating the trading profits for the company. This is therefore used before trading losses are brought forward.

The quantity of the R&D claim itself will remain unaltered, as this is dependent upon qualifying R&D expenditure. However, HMRC will consider any other outstanding liabilities of whatever nature (PAYE, VAT or any other arrears) which may therefore reduce any repayments made.

No, companies can choose how they wish to use any repayment. It is hoped that the repayments will be used for further R&D investment, however, there is no requirement for it to be applied in this manner.

Qualifying costs for R&D tax credit

No, expenditure must fall into one of the R&D qualifying categories. (refer to question 17)

CostSME SchemeRDECNotes
Staff Costs  Tick iconTick iconCost of employing staff (gross salary, overtime, bonuses, employers’ national insurance and employees’ pension contributions)
ConsumablesTick iconTick iconMaterials consumed within the R&D (can include prototype costs, light, heat and water)
SubcontractorsTick iconTick iconSee below
SoftwareTick iconTick iconSoftware costs (those incurred either directly in the R&D process such as CAD software or other equivalent or costs incurred in indirectly supporting the process, such as Microsoft packages or accounting software)
Externally provided workersTick iconTick iconExternally provided workers (this can include staff employed through an agency or a director or member of staff employed by another company within a group of companies)
Clinical volunteersTick iconTick icon
Contributions to universitiesTick icon

Subcontractors

A subcontractor relationship exists where all or part of a project is subcontracted. It does not apply where individuals supply labour to work on an R&D project.

Under the RDEC the costs of a subcontractor can only be claimed where the subcontractor cannot claim, for example if the subcontractor is an individual or a university. If the subcontractor is an SME, the subcontractor would claim under the RDEC.

The uncertainty for R&D Tax Credits, must have a basis in a natural science rather than a business uncertainty, or an uncertainty based in social sciences or management science.

Internet and phone costs do not fall into any qualifying category for R&D Tax Credits, as they are not consumed and therefore cannot be claimed. Rent is another common expense that cannot be claimed. 

The costs must be directly related to the product development. R&D activities stop when the uncertainty is resolved. As packaging costs are incurred at this point they are not claimable costs.  
 
Obviously, if the company is developing packaging which fulfils the R&D qualifying criteria then this would enable a claim to be considered. 

R&D tax credit and Brexit

As with any tax relief, R&D Tax Credits can be abolished or reformed as part of the government’s annual budget considerations. However, successive Governments have continually improved the relief, making it more valuable and easier to claim. In our view, it is unlikely that the R&D Tax Credits scheme will be abolished because many other countries have similar regimes and the UK needs to be more competitive than ever in the face of Brexit.

R&D tax credit and HMRC

No, this is a statutory tax relief. There is no more risk of an enquiry if the claim has been made correctly and relevant supporting information has been submitted. HMRC support this relief and want more qualifying companies to claim.

Enquiries into R&D tax credits tend to be confined to looking at the claim rather than being extended to other areas of the company.

There are many areas of this tax relief which are open to interpretation and most enquiries are merely HMRC seeking a better understanding of the R&D which the company has been undertaking and how the relief has been calculated.

This is the one area of tax where an enquiry is not necessarily a bad thing. At the end of the enquiry, we have an agreed way forward.

We will, in conjunction with your accountants, handle all aspects of the enquiry on your behalf. The cost of handling the enquiry is included in our fee so there will be no further cost to the client.

Generally speaking, HMRC try to raise any enquiries into a claim before the claim is processed and any tax repayments are not normally made until this has been concluded. However, as long as they are within relevant time limits set down by tax legislation, it is possible (but very unlikely) that HMRC could raise an enquiry after the claim.

Yes. This is because R&D Tax Credit is a specialised area and HMRC have set up specialist teams around the country. Once the claim has been submitted, the tax affairs of the company will be transferred to the appropriate district; each specialist district deals with a specified industry, for example Cambridge deals with bio/pharma and Cardiff deals with software.

In our experience, it is an advantage being dealt with by one of these specialist units. The inspectors in the units have a better understanding of R&D, so it is easier to explain why your activities are research and development. One of the problems we had prior to the setting up of these units, was having to deal with inspectors who had no understanding or experience in this area. 

In our experience, the transfer does not increase the risk of an enquiry. HMRC have a well-established sampling and risk management system to select cases for enquiries and claiming R&D Tax Credits should not have any effect on this. 

R&D tax credit claims

R&D Tax Credits are claimed for each accounting period in which a company undertakes qualifying activities. There is no limit to the number of times a claim can be made.

The claim for R&D Tax Credit is only based on the qualifying expenditure. Turnover does not feature in the calculations. 

A claim can be made as long as it is within the time limits set down by tax legislation. The time limit for making a claim is two years from the end of a company’s accounting period. For example, a company with a year end of 31 October 2017 has until 31 October 2019 to make a claim.

A claim can also be amended within the same timescale. 

Yes, in this case estimates can be made and are accepted by HMRC as long as a fair and reasonable basis has been used. HMRC understand that if a company was not aware it could claim, then it would not have the necessary accounting records in place at the time. The company is expected to put record keeping procedures in place, to support subsequent claims.

The maximum amount that can be claimed per project is €200,000. If your company has been involved with various qualifying projects, this number applies to each.

R&D tax credit explained

R&D Tax credits claimed under the SME scheme should be reflected in the tax charge in the accounts. Any repayments are not taxable income.  

The position for companies claiming under the RDEC scheme is slightly different as the income is taxable upon the company. Any RDEC acts as payment against the tax bill rather than reducing it. 

No, the scheme is not aggressive tax planning. It is a statutory tax relief which was introduced by the government to try and encourage companies to invest more in developing new products, processes or services.

R&D stands for Research and Development. In the case of Research and Development tax credits the term research and development differs from its everyday meaning. This is one of the factors that causes the most misconceptions. As well as the obvious advances in medical science and the latest high tech products it also includes any companies who are trying to develop new or appreciably improved products, processes or services where the development involves some uncertainty.

HMRC will normally accept the technical officers of a company, as a 'competent professional'. We often include the CVs of the relevant technical people within the report we submit to HMRC, to support this. 

RDEC Scheme

The legislation is quite complex but broadly speaking the criteria for a company to claim under the SME scheme rather than the RDEC is that the number of full time employees is less than 500 and either a turnover of less than €100 m or balance sheet assets of less than €86 m.

The size is affected by whether the company is part of a group of companies or the shareholders have involvement in other companies. 

Despite the company meeting the SME criteria there may be projects which are ineligible for the SME scheme. This can occur when the company has received a grant that is notifiable state aid under EU regulations or where the company is subcontracted work from a company that is only able to claim under the RDEC.

The SME scheme applies to companies who satisfy the requirements of the small and medium sized enterprise scheme.

The RDEC applies to any company that does not qualify for the SME scheme.

This includes companies who fail to meet the size requirements and therefore can only claim under the RDEC or companies who may have individual projects which do not qualify under the SME scheme if, for example, they are receiving certain grants or they have work subcontracted to them by a company that does not qualify under the SME scheme.

In the latter case, this means that a company that meets the size requirement but has projects that do not qualify can claim under both schemes.

SME Scheme

The legislation is quite complex but broadly speaking the criteria for a company to claim under the SME scheme rather than the RDEC is that the number of full time employees is less than 500 and either a turnover of less than €100 m or balance sheet assets of less than €86 m.

The size is affected by whether the company is part of a group of companies or the shareholders have involvement in other companies. 

Despite the company meeting the SME criteria there may be projects which are ineligible for the SME scheme. This can occur when the company has received a grant that is notifiable state aid under EU regulations or where the company is subcontracted work from a company that is only able to claim under the RDEC.

Under the SME scheme, the company receives a second tax deduction for the qualifying costs on top of the normal tax deduction that the company receives through its accounts. The second deduction goes through the company’s corporation tax return and is currently 130% of the qualifying costs. This gives a total effective tax deduction for the qualifying costs of 230%.

The second tax deduction will reduce the taxable profits of the company giving relief at the company’s tax rate, currently 19%.

This means that for every £1 spent the company receives an extra tax saving of 24.7p on top of the normal tax saving of 19p.

If the extra tax deduction is greater than the taxable profits, a tax loss will be created. Normally, a tax loss can be carried back against taxable profits in the previous 12 months or used to relieve taxable profits of other group companies. Any remaining loss is then carried forward to be used against future profits.

With a loss produced by R&D tax credits we have the option of surrendering the loss for cash rather than carrying it forward. The rate of surrender is less than the rate received if the loss is carried forward, 14.5% rather than 19% but most companies prefer to have a lower amount of cash sooner rather than a higher amount later.

The loss that can be surrendered is restricted to the loss relating to R&D not general trading.

The SME scheme applies to companies who satisfy the requirements of the small and medium sized enterprise scheme.

The RDEC applies to any company that does not qualify for the SME scheme.

This includes companies who fail to meet the size requirements and therefore can only claim under the RDEC or companies who may have individual projects which do not qualify under the SME scheme if, for example, they are receiving certain grants or they have work subcontracted to them by a company that does not qualify under the SME scheme.

In the latter case, this means that a company that meets the size requirement but has projects that do not qualify can claim under both schemes.

Subcontractors and R&D tax credit

This does depend upon the contractual relationship between the companies. Expenditure may need to be claimed under the RDEC scheme as opposed to the SME scheme.

This can be an extremely complex area and does depend upon the contractual relationship between the company and subcontractor and assessing where the risk lies. It may be that both companies can claim if there is a collaborative effort. 

A subcontractor is someone who undertakes specialist activities in relation to the R&D on behalf of the company claiming R&D Tax credits.

Externally provided workers are staff employed by the company through an employment agency but also includes staff supplied by another related or group company.

For R&D purposes the relief on the costs is the same, relief is restricted to 65% if they are unconnected or 100% if they are connected or an election is made to treat them as connected. 

Unconnected means the subcontractors are at arm’s length and there is no relationship between the companies or shareholders.

Connected parties includes companies whom may have common shareholders/control or are in a group relationship. 

Relief on unconnected subcontracted costs is restricted to 65%.

If the company and the subcontractor are connected the actual costs of the work undertaken by the subcontractor can be claimed.

If an unconnected subcontractor is willing to disclose the actual costs of the R&D both parties can elect to be treated as if they are connected.

Call Fiscale Today!

Why not contact us today to discuss your business’ R&D tax relief? It only takes our team around 20 minutes to determine if you are eligible or not.