Category: R&D

Categories
R&D

Are you sat on secret R&D?

Are you sat on secret R&D

Are you sat on secret R&D?

Even though you already claim R&D Tax Credits, there’s every possibility your company could be sat on ‘secret’ R&D. But what do we mean by ‘secret’ R&D? Well, we often come across clients that have developed or built a product, process or service specifically for themselves without recognising that what they are doing is research and development. They are so focused on just ‘doing’ the work they do, they don’t recognise the steps they are taking. It’s only when you start thinking in a certain way that you begin to recognise that you are sat on products, service and processes that you could claim R&D Tax Relief for.  

With that in mind, we want to share some examples, to give you an idea of the types of activity and situations in which secret R&D occurs. 

 

ARE YOU SAT ON SECRET R&D? 

Secret R&D can manifest in many different ways, through things like: 

  • Investing in technology and bespoke integration to improve efficiency 

  • Developing specialist software to resolve inefficiencies in business processes 

  • Developing new products to improve service delivery 

  • Developing an existing service to improve customer experience 

  • Developing new systems to improve business processes 

 
Here’s five real life examples of businesses that had been sat on secret R&D …. 

Business: SAAS Technology solutions  
Secret R&D: Business as Usual 
R&D Tax Refund: £7.5K 
 
Working with clients to deliver bespoke technology business solutions for a wide range of industries and business scenarios, this company delivers R&D qualifying projects pretty much every day. The business was so involved in the day-to-day, they didn’t recognise that they were delivering research and development, daily. The company had also invested significant resource into the development of their own technology solution, just seeing it as an internal project needed to improve their efficiency. 

Working with a client they recently developed one of the UK’s most advanced smart metering platforms leading to just over £7.5K of R&D tax credits. 

full trolley

Business: E-commerce  
Secret R&D: Resolving Inefficiency 
R&D Tax Refund: £6K 
 
An ecommerce business specialising in sports accessories, developed a specialist shipping integration software to improve inefficiencies in their business processes. Working with a subcontractor, they modified a program to make it more efficient for use within their business. Significant improvements were made to the software program to integrate the software into their systems, and the internal R&D project generated a claim worth £6k over a two year period. 

Although the business set out to resolve inefficiencies in their business process, they were too involved in the project to recognise their own work to be innovative.  

 

builders hat

Business: Scaffolding contractors  
Secret R&D: Save Time & Money 
R&D Tax Refund: £22K 
 
These guys are experts in scaffolding, specialising in the provision of scaffolding installations to a wide range of industries. They had invested in the development of a free-standing scaffolding structure to be used for internal scaffolding, primarily to save their time and cost when setting up jobs. 

The company was clueless that what they had set out to do was an R&D project. They just wanted to save themselves time and money! However, in the process they developed a new innovative scaffolding product applicable industry wide and acquired a corporation tax repayment of over £22K for a two year period. 

a pint

Business: Gastropub & Hotel 
Secret R&D: Improve customer experience 
R&D Tax Refund: £7K 

A Gastropub and Hotel based in the North of England, wanted to provide a menu that catered for all tastes and needs, as they wanted everyone to find something really good on the menu. They knew it didn’t make economic sense to have a dozen different menus, so they worked on a new menu to cater for all dietary requirements.  

The gastropub developed an innovative menu that could be produced to cater for vegan and gluten free diets, without compromising on the customer experience. 

The owner was convinced there wouldn’t be a claim because it’s just ‘what they do’ but when he reflected on all the hard work that goes into crafting their menus he was able to see the numerous research and development steps in their work. 

This work realised an R&D Tax claim of £7k for the gastropub. 

models

Business: Fashion & Apparel  
Secret R&D: Sales tool 
R&D Tax Refund: £15K 

A women’s clothing manufacturer and retailer, developed a unique sports clothing range for pregnant women which they understood would qualify for an R&D claim. However, alongside this they delivered a complex website project which included the development of a global directory of maternity fitness instructors. Developed as a sales tool, the business was completely unaware that they had built something completely new and innovative. 

Altogether the R&D projects equalled a total benefit of just over £15K. 

Ensuring you identify all the R&D in your business requires a mindset change, and cultural shift to make it work business wide. You have to change the way you think about what you are doing day-to-day. Encourage your employees to constantly challenge the way they – and others – do things, to make suggestions for improvements and bring forward new ideas.  
 
You could be sat on secret R&D gold. 

 
THINK YOU MIGHT BE ELIGIBLE TO CLAIM? 
 
If you think you might be eligible for R&D Tax Relief, and you’d like to find out more about how we can help you make your R&D claim, please book a call here. 

 

Partners with Radish Tax 

We’ve partnered with Radish Tax by Diagnostax – a specialist R&D Tax Relief provider. Tim & the team at Radish Tax are friendly, easy to work with and make the process of claiming R&D Tax Relief painless.   

Find out more about Radish Tax by Diagnostax.    

Categories
R&D

Can I claim R&D Tax Credits & Patent Box Relief? 

Claim both R&D tax credits and patent box relief?

Can I claim R&D Tax Credits and Patent Box Relief?

If you are claiming R&D Tax Relief and you have invested in patents or other equivalent Intellectual Property, you might be eligible for another cheeky tax relief known as Patent Box Tax Relief. Like R&D Tax Relief, Patent Box Relief is an incentive designed to drive UK companies to innovate, but with the specific intention of retaining Intellectual Property in the UK.   

Read on to find out more about Patent Box Relief and how it interacts with your R&D Tax Relief claim.

mobile with light bulb image

WHAT IS PATENT BOX TAX RELIEF? 

You may be able to make a Patent Box Relief claim if you own: 

  • patents that are making your business a profit, or, 
     

  • profitable, unpatented intellectual property which you could patent. 

If you are doing one of the above activities, you may be able to make a Patent Box Tax Relief claim that could reduce your business corporation tax to 10%.  

 
AM I ELIGIBLE TO CLAIM PATENT BOX? 

To be eligible to claim, you must:  

  • be a UK Limited company paying UK corporation tax, and, 
     

  • have developed an innovative product or process, filed a patent application, and made profits that are related to the patent.  

When you hear patent, you might automatically think of groundbreaking inventions but it’s doesn’t have to be this complex. Patented inventions can be as a result of a relatively small technical improvement to a product or process. 

If you are put off by the prospect of a difficult, expensive process to apply for a patent, well the Patent Box Relief should provide the silver lining. For it’s not just UK profits that qualify for the relief. An amazing 100% of the company’s worldwide profits resulted from that patented product or process, could qualify for a reduction to 10% corporation tax. From 1st April 2023 that’s up to a 15% saving! 

Similar to R&D Tax Relief, Patent Box claims must be made before two years AFTER the end of the accounting year in which the relevant profits and income were made.   

 

Patented ?

CAN YOU USE BOTH R&D TAX RELIEF & PATENT BOX SCHEMES? 

The short answer is yes. You might have thought that because the activity is all focused on innovation that there might be exemptions around being able to claim both. Wrong. The two schemes are separate but they can be combined, which is great news! 

Companies can benefit from 10% corporation tax for profits related to the patented product or process, whilst claiming up to £25 for every £100 spent on Research and Development. But the savings do interact with each other. R&D tax relief reduces your profits subject to corporation tax, whilst patent box applies a 10% tax rate on profits after applying R&D tax relief and the patent box calculations. 

If you’re actively involved in patents, alongside your R&D activity you need to make sure you are maximizing both schemes.   

 
Let’s take a look at an example.. 

A cosmetic dentistry business made £800k profit for the accounting period ending 31st July 2021. They expect to pay £152k in corporation tax.  

They own a patent for cosmetic dentistry which was granted for the UK in September 2020. They made £100k profit from the patent. 

The business also undertook Research and Development (R&D) in respect of prototyping the product which cost them £100k in this accounting period. 

Firstly, they can claim an additional £130k deduction from their profits due to the R&D activities which reduces their profits subject to tax, down to £670k. This saves them £24,700. 

Secondly with a patent box election, the £100k patent profits are taxed at 10% instead of 19%. This saves them £9k. 

By making these claims, it means the company will now pay £118,300 in tax, resulting in a total saving of £33,700. 

 

ELIGIBLE FOR R&D & PATENT BOX RELIEF? 

If you think you might qualify for Patent Box Relief, get in touch and we will help make sure you maximise your claims across both schemes.  

Book a scoping call hereto discuss your claims.  

 

Partners with Radish Tax 

We’ve partnered with Radish Tax by Diagnostax – a specialist R&D Tax Relief provider. Tim & the team at Radish Tax are friendly, easy to work with and make the process of claiming R&D Tax Relief painless.   

Categories
R&D

How will external funding affect my R&D claim?

How will funding affect my R&D claim?

How will external funding affect my R&D claim?

Companies often think they can only make an R&D claim if they have funded the entire R&D project out of their own pocket. There are some nuances of course but is unlikely that external funding would void a claim. Companies can receive grant funding and R&D Tax Credits for the same R&D project.  
 
Let’s take a look at the five most common types of funding and how they could impact your R&D Tax Relief claim: 

 

  1. PRIVATE FUNDING (e.g. share equity or private loans)  

 

There are no restrictions on making an R&D claim if the project is funded by a private funder with equity shares or loans.  

For example:  

£100k equity or debt funded into SME by director or private investor / investors. 

£80k spent on developing app e.g. salaries, software licences, outsourced developers (this is restricted to 65%). 

£80k uplifted to get additional £104k R&D tax relief deduction. 

£184k can be sacrificed for an R&D tax credit of £26.7k. 

 

piece of a pie (coloured pie)

  1. LARGE CORPORATE (e.g. equity) 

 
If your R&D project is funded by a large corporate that takes a significant portion of equity, you may only be able to claim via the RDEC scheme. This might be restricted even further if the R&D work was outsourced, or if the company has no PAYE bill. 

For example:  

  

£6m equity into SME from large corporation, taking 60% of the company. 

£1m spent on developing a prototype of a new product, invested in staff costs, materials and consumables. 

Up to £105,300 could be claimed as R&D tax credits under the RDEC Scheme. 

 

piggy bank

  1. GRANTS 

Many companies believe that if you receive a grant, you cannot claim R&D Tax Credits for the same R&D work. This is often not the case. However, a grant will impact your R&D Tax Credits claim, and the amount you can claim.  

How it affects the claim depends on whether the grant is classified as notified state aid or non-state aid, and whether it is project specific or non-project specific. 
 

Here is a breakdown of four key scenarios: 

  1. Notified state aid: Non-project-specific grant 

If a grant is classified as notified state aid and is non-project specific, R&D projects you spend this funding on will not be eligible for SME relief but you can claim via the RDEC scheme. An example of such a grant is the Coronavirus Business Interruption Loan scheme (CBILS). 

For example: 

A £500k CBILS loan is received. The funds are not segregated by the business on receipt. £1m is then spent on 3 separate projects using the £500k CBILS and £500k of company reserves. Sadly, the projects only qualify for the RDEC Scheme in this case, meaning a maximum cash refund of £105,300. 

 

  1. Notified state aid: Project-specific grant 

This relates to grants classified as notified state aid but they are project specific i.e. the grant is to provided funding for a specific project.  Any grant funds invested in the project that are eligible for R&D Tax Relief should be claimed via the RDEC scheme. However, any other funds privately invested in other R&D projects that are eligible, can be claimed under the more generous SME scheme.   

Here’s an example: 

An innovate UK grant to develop a prototype machine is awarded, where 50% is covered by the grant and 50% is matched by the company using its own funds. The project cost is £1m. The £500k funded by the grant is eligible for up to 10.53% cashback (under RDEC) as is the £500k self-funded element. The company also spends £100k on a separate project, which could be eligible for the R&D SME scheme at up to 33.35% cashback. 

 

  1. De Minimis state aid grant  

If a company has received less than €200,000 over three years, this grant may qualify as de minimis aid under the De Minimis Regulations. This type of grant doesn’t have to be reported to the European Commission, and is not counted as state aid. Any of the funding invested in qualifying R&D projects must be claimed via the RDEC scheme. However any private funds invested in R&D projects that are eligible, can be claimed via the R&D SME scheme.   

 

  1. Non-state-aid grant 

As with de minimis state aid grants, any of the non-state-aid grant invested in qualifying R&D projects must be claimed via the RDEC scheme. But any other privately invested funds can be claimed under the R&D SME scheme. 

 

covid-19 funding

  1. COVID-19 FUNDING 

Since the launch of various emergency grants to help businesses through the Coronavirus pandemic, there has been some uncertainty about how these funds will impact R&D Tax Relief Claims. We can confirm these initiatives have been classified as notified state aid, and R&D projects you spend this funding on will not be eligible for SME relief but you can claim via the RDEC scheme. 

We’d recommend ringfencing these funds, so there is a clear audit trail of how the funds were invested. 

This is especially important with CBILS given the potential for it to bring all costs for all projects within the RDEC scheme, where the self–funded element might have otherwise been eligible for the R&D SME scheme 

 

  1. SEIS, EIS & VENTURE CAPITAL TRUSTS 

If you have raised funds for your small business through an Enterprise Investment Scheme (EIS / SEIS) or Venture Capital Trust (VCT), you’ll need to know how these funds impact your R&D Tax Relief Claim. The good news is R&D Tax Relief can be claimed in conjunction with these funds, and there are no limitations on how those funds can be used, or the qualifying R&D expenditure. 

 

THINK YOU MIGHT BE ELIGIBLE TO CLAIM? 
 
If you think you might be eligible for R&D Tax Relief, and you’d like to find out more about how we can help you make your R&D claim, please book a call here.  

 
Partners with Radish Tax 

We’ve partnered with Radish Tax by Diagnostax – a specialist R&D Tax Relief provider. Tim & the team at Radish Tax are friendly, easy to work with and make the process of claiming R&D Tax Relief painless.   

Find out more about Radish Tax by Diagnostax.    

 

 

1. Book a call with me: https://debbiebaileymoney.co.uk//contact-us/ 

2. Download my free guide on “7 mistakes to avoid – to stop your fitness business running out of cash” https://debbiebaileymoney.co.uk//fitness-ebook/ 

3. Connect with me on social media: 

 

 

Categories
R&D

Can I claim tax relief for failed R&D projects?

failed R&D claim

Can I claim tax relief for failed R&D projects?

Failure is a reality of life, and the same applies in business. Failure comes hand in hand with innovation; it’s a by-product of learning and development. So to innovate, is to take a risk. When you start an R&D project, you have no guarantee that the project is going to be a success. You know that. That’s why R&D tax credits exist, to incentivise businesses to take that risk. 

 
FAILED R&D IS STILL R&D 

R&D tax relief is not solely aimed at rewarding successful projects, it is intended to incentivise certain behaviour in businesses. The Government Guidelines on the meaning of research and development for tax purposes, clearly state: 

“Even if the advance in science or technology sought by a project is not achieved or not fully realised, R&D still takes place.” (Paragraph 10)

 

Phone - R&D still takes place if project is not achieved

Here’s four points you should consider if an R&D project you are working on fails: 

  • Not all projects achieve the advance in science or technology they are seeking:  
    As long as the projects seeks to achieve an advance in science or technology and completes work to attempt to resolve the scientific or technological uncertainty, R&D applies. 
     

  • Projects that fail can often be the most fruitful, from a learning perspective:  
    The information from these projects is invaluable. The more you fail, the more you learn and get closer to your goal of success.  
     

  • If a project fails, keep a record of why:  
    If it’s a technical reason make sure you raise this with us, and that we consider this when you claim. 

 

  • If a project fails for business, commercial or legal reasons, it’s not a failed R&D project: 
    You still have to look at the advances sought, and technical difficulties and challenges faced. Provided the project meets these criteria, you can claim, whether or not you achieved the intended outcome. 

 
FAILED PROJECTS THAT CLAIMED R&D 

SOFTWARE:  

man looking at computer

Attempted integration of several systems for a bespoke enterprise resource planning system, where APIs were either not set up or of limited use. Significant time and effort went into trying to find a workable solution, but technical difficulties lead the project to be put on hold whilst other solutions were considered. The investment of staff time and external subcontractors had run to £120k and lead to an R&D tax refund of £25k in total.   
 

ENGINEERING:  

manufacturing plant

Development of an adjusted process to reduce waste in the manufacturing process. The company manufactures car parts and was trying to find ways to reduce the waste materials produced in the production process. After trialling three different methods and testing new materials, no significant reductions in waste were available. The project was abandoned due to other business areas becoming prioritised when the market changed due to Covid. The in-house team’s time and some materials and tooling costs were incurred, which resulted in a tax credit refund of £55k. 

 

FAILED R&D FOR FUNDING 

An R&D Tax claim can be a very welcome friend, following the financial hit of a failed project, it takes the edge off the risk and enables further investment into innovation.  It’s a great way to fund R&D projects and claw back the losses from the failed work, so you can go again. If successful, R&D tax credits can provide businesses with the funding to kickstart further projects and enable a continuous flow of funded innovation.  And innovation promotes more innovation. 

 
THINK YOU MIGHT BE ELIGIBLE TO CLAIM? 

If you think you might be eligible for R&D Tax Relief, and you’d like to find out more about how we can help you make your R&D claim, please book a call here.  

 
Partners with Radish Tax 

We’ve partnered with Radish Tax by Diagnostax – a specialist R&D Tax Relief provider. Tim & the team at Radish Tax are friendly, easy to work with and make the process of claiming R&D Tax Relief painless.   

Categories
Business tips R&D

4 Ways to bring forward your R&D Tax Credit  

bring R&D forward. lady bursting through

4 Ways tor bring forward your R&D tax credit

With the backlash of Covid-19 and the relentless lockdowns, businesses have been hit hard. It’s hardly surprising cashflow is on every business owners mind right now. This is just one of many reasons, you might be looking to fast forward your R&D tax claim. If successful, bringing forward your R&D tax refund could be a huge helping hand for your business.  

 

4 WAYS TO BRING FORWARD YOUR R&D TAX CREDIT  

So how can a company fast forward their R&D Tax Credit?  Well, there are four routes we’re going to share with you, that are realistic options and easy to implement. 

These are: 

  • Shortening your year-end  

  • Shortening your year-end…..again 

  • Applying for advance funding  

  • Getting your account filed on time 
      

Before we look at the first option, let’s start with a quick recap on the timeframes. The hard and fast deadline for making a claim is two years after the end of the accounting year in which you incurred the costs. If you don’t claim within that two year window, you have missed out and there is no way to claw it back. 

R&D tax claims are made via the company’s tax return which cover the same period as the company’s accounting year. You can only prepare and submit your accounts and tax return after the end of your accounting year. So in theory the earliest you can make your R&D Tax Credit claim is the day after the end of your accounting year. 

man with a clock head

  1. SHORTENING YOUR COMPANY YEAR END  

Companies House automatically sets your company year-end based on the last day of the month the business was incorporated. But you can change your accounting year–end. 

If you are experiencing cashflow issues, shortening your company year-end to bring the R&D Tax credit forward could be a way to get money back into your business faster. If money is tight, you should seriously consider shortening your current accounting period end, so you can make the claim as soon as feasibly possible. 
 
Here’s an example. 

A Software Company with a June year end has R&D costs of £100k and total losses of £100k up to 31 March 2021. However, they have forecasted their spend to be significantly less up to June. 

As a result they decide to shorten the year–end by nine months, bringing it forward to 31st March 2021. By doing this they can now submit an R&D Tax Credit claim of £33,350 to HMRC, three months earlier.  
 

  1. SHORTENING YOUR COMPANY YEAR END…..AGAIN 

There’s actually no limit on how often you can shorten your accounting period year end. If you are expecting a fairly sizable credit, you could bring your year–end – and claim – forward by 6 months, say from September 2021 to April 2021, getting the cash back into your business by the June. You could then bring it forward again to the September and get even more cash into your business. The only thing to be mindful of is the fees associated with shortening your accounting period but these are likely to be minimal in comparison to the benefit of the cash to your business. 
 

  1. THERE’S MORE….ADVANCE FUNDING 

There are lending companies that may lend you up to 50% of your tax credits up to six months before the end of your accounting year. The lender would need to perform a due diligence and eligibility assessment, to determine just how much they could lend you. If they agree to provide the funding the money is transferred to you, and when HMRC pays your R&D claim, you use the credit to repay the debt.  

Here’s an example: 

A Manufacturing company has been claiming R&D Tax Relief for three years and each year they get approximately £100k back from HMRC. 

They have a June year–end, but their accounts and tax usually take nine months to finalise. Advance funding is available in January 2021 for the June 2021 year–end, which would otherwise only have been received in around May 2022. This effectively brings the cashflow forward by 16 months, with only the financing cost to the client. 

 

lady smiling

 

  1. GET YOUR ACCOUNTS FILED PROMPTLY  

The earlier you get can get all the necessary company information to your accountant, the quicker they can process your R&D Tax Relief claim. You can’t do one without the other. We don’t want to be waiting to submit our clients R&D Tax Claims because we haven’t got expense receipts! It’s valuable funds waiting to come back into your business.  

NEED MONEY NOW? 
If you’d like to explore bringing forward your R&D tax claim, we can help you,please book a call here.  

 

Partners with Radish Tax 

We’ve partnered with Radish Tax by Diagnostax – a specialist R&D Tax Relief provider. Tim & the team at Radish Tax are friendly, easy to work with and make the process of claiming R&D Tax Relief painless.   

Categories
R&D

What software expenses can I claim for?

software can I claim for

What software expenses can I claim for?

Almost every R&D Tax Relief claim that we process includes some form of software costs. But it’s hardly surprising, as every business today has software costs. We use software in just about every business process we do! It’s also the one R&D cost that most businesses feel comfortable with, when they come to make their R&D claim.  

But what you might not know, is that there is one big grey area, meaning certain software costs cannot be claimed. 

Let’s find out the fundamental rules when it comes to software costs, and what exactly this mysterious grey area is.  

lady surrounded by post its

SOFTWARE COSTS: THE FUNDAMENTAL RULES 

The rules around software costs would appear to be straightforward: 

  • If the software has been purchased only to be used in an R&D project, then you can include 100% of the cost in the R&D tax claim.  
     

  • If you use the software for other business activities that sit outside of the R&D project, then you need to calculate an appropriate proportion of the software’s cost to be included in your claim. 

Simples, right? 

meercat

OFTWARE COSTS: THE GREY AREA   
With software, there are often ‘other costs’, that are incurred alongside the software when it is leased from external parties. It’s these costs where the grey areas start to creep in. These costs fall under the banner of ‘cloud computing’ and charges could be for a whole range of activities, including use of software, storage rental, and support.  

grey cloud

CLOUD COMPUTING & HOSTING 

Cloud computing and hosting is particularly relevant for businesses that are involved in R&D projects related to the development of software. It’s these ‘cloud computing’ costs that unfortunately do not meet the requirements of any of the qualifying criteria to make an R&D claim. It’s quite common for businesses to purchase packages which are used to support activity across their business operations as well as R&D activity. Therefore, it’s key to track the costs dedicated specifically to hosting the testing and development environment, when using the services.  

The likelihood is you’ll be using software somewhere in your business, and it could impact your R&D claim. Like a lot of R&D categories, software has its grey areas, but that’s what we are here for, we will work with you to ensure you submit an accurate R&D claim. 
 
As we speak new changes are on the horizon to include cloud computing and data costs, but stick with us and we’ll make sure you’re up-to-date as the changes come in. 
 

THINK YOU MIGHT BE ELIGIBLE TO CLAIM? 
 
If you think you might be eligible for R&D Tax Relief, and you’d like to find out more about how we can help you make your R&D claim, please book a call here.  

 

Partners with Radish Tax 

We’ve partnered with Radish Tax by Diagnostax – a specialist R&D Tax Relief provider. Tim & the team at Radish Tax are friendly, easy to work with and make the process of claiming R&D Tax Relief painless.   

Find out more about Radish Tax by Diagnostax.    

 

 

1. Book a call with me: https://debbiebaileymoney.co.uk//contact-us/ 

2. Download my free guide on “7 mistakes to avoid – to stop your fitness business running out of cash” https://debbiebaileymoney.co.uk//fitness-ebook/ 

3. Connect with me on social media: 

 

 

Categories
R&D

14 Quick wins to get EVEN MORE money back in your next R&D claim

14 quick wins for R&D

14 Quick wins to get EVEN MORE back in your next R&D claim

Remember that feeling when your first R&D tax refund hit money hit your bank account? Well, we want you to feel this every time you make a claim! How? By making sure you are prepared and  maximising every R&D claim. 

To help we have complied 14 quick wins to optimise your R&D claim. From missed expenses, to record-keeping, to choosing the right R&D scheme; even the way you are paid!  

We’re confident there will be something new to consider, starting with expenses…. 

 

hand and expenses

7 MOST COMMON OVERLOOKED EXPENSES  
 
Here’s seven examples of costs that are commonly missed in R&D claims: 

 

  1. Expenses paid on a personal card 
    We see this time and time again. Here’s an example: A business spends £15k on travel to meet R&D sub-contractors; paid for on a company card. If the travel had been paid on a personal card and reimbursed by the company, they could have claimed back £5k! 
     

  1. Expenses when acting as a subcontractor  

Easily overlooked and often misunderstood. Subcontractors working as a third party in R&D for a large company can claim expenses under the RDEC Scheme.  
 

  1. Expenses delivering work for a customer  
    Similar concept to number 2. If you are delivering a lot of R&D work for third parties; don’t assume the work doesn’t qualify because it is for another company – keep a record of all R&D projects the business is involved in internally and for third parties. 
     

  1. Rent bundled into a package 

You might not be aware that rent cannot be included in your R&D claim…unless it is bundled into a package with say your utilities. If your circumstances change, make us aware, as this could make part of your rent claimable. 
 

  1. Expenses for non-technical support staff  

The best advice for staff costs is to keep a record of all staff involved in R&D projects (technical or not). They might not all qualify but if there are supporting roles involved you may be able to claim money back for your business.   

  1. The Planning Stage 

Many businesses fail to include the planning stages for R&D projects, thinking it only begins when the materials costs kick in for example. But an R&D project doesn’t just start. There is always an element of time invested into preparatory work. Include it. 
 

  1. Pre-trading expenses in a first R&D tax credit claim 
    For newly formed companies, you can include qualifying pre-trading expenses in an R&D claim. This isn’t relevant for existing claims but for customers who have setup new companies that could qualify for R&D. Substantial research and development can often take place prior to a company beginning to trade and can be included in your R&D claim. In fact an R&D cash credit can even be claimed before a business starts to trade.  

 
Road & Roundabout

IMPORTANCE OF QUALITY RECORD-KEEPING 

It’s vital to get a grip of good record-keeping for R&D projects, as it can really improve your R&D Tax Relief claim, leading to more money back and a robust audit trail. 

 

  1. Review existing systems for record-keeping 

A quick win for record-keeping is to follow these three steps to see what you are doing at the moment and where there could be improvements or modifications: 

 

STEP 1 – Identify the records you can be confident in 

STEP 2 – Then determine where you are estimating 

STEP 3 – Tweak your systems to give greater confidence 

 

  1. Keep a list of R&D Projects  
    Keep a list of all the R&D projects that you’re working on, to make sure no projects are missed. Even if they turn out not to be eligible – there could be entire projects you are missing out altogether. 
     
    TIP: An additional good practice tip to include here, is to keep a record of the advances sought and the uncertainties present before you kick-off an R&D project. 
     

  1. Tracking Consumable Materials 
    Issuing an in-house purchase order is a great way to track costs of any consumable materials you use for your R&D projects. 
     

  1. Tracking Staff Costs  
    Staff costs are one of the key expenses to claim, and so it’s critical to evidence the time of those involved in R&D Projects, if you are looking to maximise your claim to the fullest. We recommend incorporating real-time systems for timekeeping, such as Clockify. 
     

  1. Subcontractor contracts  
    Now these are important and worth exploring for future R&D claims.  Your R&D claims could be improved by agreeing in subcontracting relationships, who can claim the R&D. Only one party in the relationship will be eligible for the tax relief, as you can’t both claim for the same project. We recommend putting a contract in place which details who has rights to the claim. 
     

  2.  

cone

YOUR COMPANY STRUCTURE 

To claim R&D you need to be a limited company, within the scope of corporation tax (but note you don’t actually have to be paying it i.e. loss making companies can claim). There are then a few things you should consider towards ensuring your claim is maximised. 

 

  1. Revisit your Salary & Dividends 

Salaries can be included in your R&D claim, BUT dividends cannot. If you are a Director – heavily involved in R&D projects – taking a small salary and much higher dividends, it’s critical to revisit how you are paid to maximise your position personally and for the R&D claim. 

  1. Part of a larger group? 

Companies face several pitfalls if they do not plan correctly. 

For businesses that are global, you can only claim for UK-based company R&D expenditure. Bearing this in mind, you need to think about where the R&D takes place within the group – who leads the R&D? Who employs the staff involved in R&D? There are some exceptions where you can recharge costs, but not all roles will qualify.  

If you are a small company operating within a large group, you should consider the benefits of accessing the higher rate of relief from the SME R&D Tax Relief Scheme. 

 

LOOKING TO MAXIMISE YOUR NEXT CLAIM? 
 
If you’re looking ahead to your next R&D claim, book in a scoping call and let’s make sure you are ready to take your claim to the max.  


 
Partners with Radish Tax 

We’ve partnered with Radish Tax by Diagnostax – a specialist R&D Tax Relief provider. Tim & the team at Radish Tax are friendly, easy to work with and make the process of claiming R&D Tax Relief painless.   

Categories
R&D

Should I outsource my R&D activity or keep it in-house?

Outsource R&D

Should I outsource my R&D activity of keep it in-house?

If you’re considering whether to bring some or all of your R&D project work inhouse versus outsourcing it, you’ll want to feel confident that you are making the right decision for your business operationally, but also to maximise your R&D claim. 

Perhaps you’re about to kickstart a new R&D project, or you’re thinking about outsourcing as you don’t want to take on a new employee. Either way, we want to equip you with all the info you need to determine the best way to incur your R&D development costs: in-house or outsourced. 

In the world of R&D you’ll often see outsourcing referred to as ‘subcontracting’. Let’s start with some definitions and explanations of what we mean when we say ‘subcontracting’. 
 

SUBCONTRACTED WORK IN R&D PROJECTS 

When it comes to R&D, subcontracted work is defined as when you contract and pay someone else to carry out R&D project activity on your behalf. 
 

There are two scenarios to be aware of when it comes to subcontracted work in R&D projects: 

SCENARIO 1: A business subcontracts work to you 
 
If a business subcontracts R&D work to your business, you might not be able to claim R&D tax relief, or only a limited claim is available to you under the RDEC scheme – reducing your claim to 10.53% of the qualifying expenditure. 
 

SCENARIO 2: Your business subcontracts work to a third party 

If your business subcontracts R&D work to a third party (unconnected to your company) – you can still claim for qualifying costs but the relief available is only 65% of those costs.  
 

ONLY 65% OF COSTS CAN BE CLAIMED…. 

As you can see, before you make any decisions, there are some key points to consider, to determine the best way to incur your R&D development costs: in-house or outsourced. 

As outlined above, if you are a business undertaking an R&D project for your own business, and you have sub-contracted part of the R&D project to a third party, you can only claim for 65% of the costs – and the R&D work must be for a specific part of the project. 

 
Here’s an example of what this might look like for a business: 

A UK company has an R&D project and they are considering whether to subcontract the design stage of the project, or use an in-house employee. The design stage is expected to take 6 months. 
 
The annual salary of an adequately skilled employee is estimated at £60K. 
 

Cost 

Employee 

Outsourced 

6-month salary 

£30,000 

  

Estimated additional fringe costs (pension, NIC, etc) 

£5,000 

  

Payment for project work to outsourcer 

  

£35,000 

Initial cash cost to company 

£35,000 

£35,000 

R&D allocation* 

90% 

100% 

Subcontractor restriction 

Nil 

65% 

R&D expenditure claimable 

£31,500 

£22,750 

 
*You’ll notice the allocation of R&D time is slightly higher for the outsourcer, as employees are likely to have other responsibilities. 

 
Let’s take a look at how the potential benefit breaks down for the Company: 
 
A) For a Profitable Company 

Corporation tax saving due to R&D 

£7,780.50 

£5,619.25 

Difference 

£2,161.25 

  

 

B) For a Loss-Making Company 

Tax credit claim 

£10,505.25 

£7,587.125 

Difference 

£2,918.125 

  

 

If the business is the subcontractor, they may not be able to claim under the SME R&D Scheme, but if they qualified under the RDEC scheme at 10.53% of qualifying expenditure: 
 

Cash refund 

£3,316.95 

0 

Difference 

£3,316.95 

  

 

So when it comes to the numbers, it’s clear to see that the tax saving is more attractive if you go down the in-house route.  

However, taking on a new employee is a big call to make, as it comes with its own challenges. There’s the cost and time involved in finding the right person, with the right skillset that will fit into the business. Then there is the ongoing time of managing that person. It’s a significant commitment to make 

 

NOT CONVINCED IN-HOUSE IS THE RIGHT WAY? 

If you’re on the fence when it comes to keeping your R&D in-house, here are some important pros and cons to consider if you’re considering the possibility of outsourcing your R&D……  

thumbs up

PROS 

  • NO IN-HOUSE EXPERTISE: Sometimes you just don’t have a choice! For example you may be looking to develop a new app but with no expertise, subcontracting to a company with the expertise is the only option. 

  • ACCESS TO MORE TALENT: By subcontracting, you have access to a greater pool of talent, global even!  

  • CHEAPER & FASTER: When it comes to R&D projects that are completely different to anything that you have done in the past, it can be much cheaper and faster to look at subcontracting rather than setting everything up in-house from scratch. 

  • SYSTEMS & PROCESSES: A quality subcontractor will already have the robust systems and processes in place to ensure the R&D work is tracked and expectations are managed – potentially a huge weight lifted. 

  • STAY FOCUSED: Outsourcing to a subcontractor helps to keep your business and its resources focused on what it is already doing. 

thumbs down

CONS 

  • THEY DON’T KNOW YOUR BUSINESS: It can be difficult for sub-contractors to have the same level of understanding of your business as your employees. However, this doesn’t always have to be a negative, sometimes a different perspective is what is needed for innovation. 

  

  • CONFLICT IN EXPECTATONS: It’s important expectations are managed, as differences of opinion can arise when it comes to the brief, the objectives or the quality of the work. This is particularly tricky if the requirements of the R&D work change after the project has started.  
     

  • CONTROL & TIMING: Letting go of control, and the day-to-day running of the project work can be difficult. But the best way to address this is to discuss your requirements and agree milestones or check points to ensure the timely delivery of the project. The subcontractor should have processes in place ready to tackle this.  
     

  • IP & CONFIDENTIALITY: Management of intellectual property, and the potential leaking of information is a risk when you take your R&D activity outside of your business. It’s easier to manage, and less likely to happen when all of your R&D activity stays in-house.  
     

zebra

THE VERDICT? 

So, there you have it. Unfortunately, there isn’t a black and white answer. We’re sorry! Whether you outsource aspects of your R&D project has to be right for your business. Our advice? First, start with the calculations. Can you afford to lose 35% of your R&D claim money coming back into your business? Then, it is a case of being honest and looking at the business case of bringing in a new employee – how do the pros and cons stack up?  

 

THINK YOU MIGHT BE ELIGIBLE TO CLAIM? 
 
If you think you might be eligible to claim R&D Tax Relief, and you’d like to find out more about how we can help you make your claim, please book a call here.  

 
Partners with Radish Tax 

We’ve partnered with Radish Tax by Diagnostax – a specialist R&D Tax Relief provider. Tim & the team at Radish Tax are friendly, easy to work with and make the process of claiming R&D Tax Relief painless.   

Find out more about Radish Tax by Diagnostax.   

 

 1. Book a call with me: https://debbiebaileymoney.co.uk//contact-us/ 

2. Download my free guide on “7 mistakes to avoid – to stop your fitness business running out of cash” https://debbiebaileymoney.co.uk//fitness-ebook/ 

3. Connect with me on social media: 

Categories
Cash Finance Function R&D

Spring Statement Update 2022

man with a clock head

Spring Statement Update 2022

As you may have seen on the news, the Chancellor announced his Tax Plan on 23rd March.

Here is a quick overview of the key changes which may apply personally and/or to your business(es):

Employing staff and taking salary from your business:

· The threshold for paying National Insurance Contributions (“NIC”) will be aligned with the personal allowance from July 2022. This will mean employees pay less NIC on their income. NIC will be paid on income over £12,570 (increased by around £3k) from this date. The change is expected to save employees over £330 per year.

· The rate of income tax is planned to be reduced from 20% to 19% in April 2024 provided the UK meets its economic targets.

· The rate of employment allowance given to employers with more than 1 member of staff will increase from 6th April 2022 by £1,000. This means employers’ NIC bill will be reduced by £1,000 next tax year.

Self-Employed Individuals:

· From April 2022, self-employed individuals with profits between the Small Profits Threshold and Lower Profits Limit will continue to build up National Insurance credits but will not pay any Class 2 NICs. This will ensure the first £12,500 earnt is tax free.

· From July 2022, the Lower Profits Limit will be aligned to the personal allowance of £12,570 (to be on par with employed individuals).

R&D Tax Reliefs:

· From April 2023, R&D costs incurred outside of the UK will no longer be eligible expenditure for R&D tax relief. On 23rd March 2022, it was announced that R&D costs incurred overseas are still claimable provided there is a material or regulatory requirement for this work to be carried out overseas.

· Also from April 2023, your business will be able to claim for all cloud costs along with all mathematics as part of your R&D Tax Relief claim. This change will mean more businesses can claim for R&D costs incurred next year and in turn, increases the money they will receive back from HMRC either as a tax credit or reduction in their corporation tax bill.

· Later this year, we expect some further reforms of the R&D tax reliefs to be announced. Further updates will be provided in due course.

Capital Investments made by businesses:

· No changes have been announced to tax relief on capital investments made by businesses as there are currently enhanced tax reliefs in place until April 2023. Later this year, we are expecting an announcement on new tax reliefs for capital investments post April 2023. We will keep you updated on the changes in due course.

VAT on energy saving materials:

· VAT will be cut to 0% on purchases of energy saving materials (a 5% saving) until 31 March 2027. This change comes in on 1st April 2022 and applies to businesses that provide and install energy-saving materials and customers who have them installed in England, Wales and Scotland.

If you have any questions on the changes or want to find out more about tax reliefs you can claim personally or as a business, please contact me

Categories
Business tips Gym R&D

How to better forecast your R&D claim

Forecast R&D claim

How to better 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’ve really got your act together, 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: 

  1. Is it even an R&D project? 

  1. What qualifying activity can I claim for? 

  1. 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…. 

 

girl karate

  1. 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 err on the side of caution it’s 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. 

AND 

 
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

women thinking

 

  1. 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.  

red herring

Here’s a couple to keep an eye out for: 
 
Software and Hosting….  

Now this one’s a little cheeky. Although software licences can be claimed, 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. 

 
Staff time…  
 
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. 

 

  1. 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 sub-contracts 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. 

 

pregnant lady

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 book a call here.  


Partners with Radish Tax 

We’ve partnered with Radish Tax by Diagnostax – a specialist R&D Tax Relief provider. Tim & the team at Radish Tax are friendly, easy to work with and make the process of claiming R&D Tax Relief painless.