A growing business is often an innovating business. You are designing and making new products to drive that growth, or you have developed new processes or software which you sell to clients as part of a service, again driving your growth.
As any business leader knows, driving growth with innovation has a cost. There are wrong turns, uncertainty to overcome, research, testing, until you reach a winning version. Then you have to build or adapt the sales process…
R&D Tax credits are a government incentive designed to increase innovation, which in turns increases business profitability, leading to rising tax receipts – creating a virtuous circle. If you are innovating, it absolutely makes sense to be claiming Research and Development (R&D) tax credits. For many companies, this is tens of thousands in reduced innovation or research and development costs.
The cost of not maximising your R&D claim
What if you’re already claiming your R&D tax credits? Even if you’re claiming back around £50,000 per year, there is every likelihood that with improved record keeping, you could claim an additional £70,000.
Think how hard you work to make each sale. Setting up your cost capture processes to maximise your R&D tax credit is nearly always a lot quicker, simpler, and easier than winning the sales to generate a similar level of profit.
Then you can afford to do that extra bit of innovation, which might drive a few percent more growth next year, which drives more profitability. Over the longer terms a few percent each year of extra growth can make a huge difference. You company could be twice as big in ten years…I’m sure you get the picture. The costs of not maximising your R&D tax credit claim can get much bigger than you think.
Step 1: Invest in your record keeping
Improving your record keeping is the first step to maximise your R&D tax credit claim. There are several areas that are applicable to nearly all companies claiming R&D tax relief:
Capture staff time accurately
Staffing costs are one of the largest costs in most businesses, making capturing staff time against projects a valuable exercise from an R&D tax credit claim perspective.Introducing a time sheeting process is an easy way to accurately capture and it doesn’t need to take up as much staff time as you think. Ask your team members to spend 5 minutes at the end of each day allocating their time approximately to each project they worked on to the nearest hour.
Commercially, knowing exactly where your staff spend their time will help you make better decisions in how and where to use their talents. You will also get early warnings of problems (time over-runs) and a detailed build up of the costs to design a product, deliver a service etc.
When your staff know the direct impact that their recorded R&D efforts have on the strength and value of the R&D tax credit claim, we often find that these people begin to look at their work very differently. The positive impact that R&D activities have on company culture, is a powerful driving force for a company to achieve its mission and strategy.
Capture all projects
Keep a list of all the projects your staff are working on even if they don’t appear to be directly related to your innovation work. An R&D tax credit expert can look at these projects and decide if any of them support your innovation work and fall within HMRC rules for R&D tax relief.
Document the advances and uncertainties
When planning each project, add a section into your project plan template that captures the advance in science and technology the project seeks to achieve.
At the start and as the project progresses, within your project plan, capture the uncertainties the project faces and how these uncertainties have been overcome.
Doing both captures key information for R&D tax credit claims when the facts are fresh in everyone’s mind, again making the claim process more robust.
Capture all the consumables spend
It’s so easy to miss capturing materials and parts being used to build a prototype – e.g. they are taken from stores and not allocated to the project properly. Or you miss allocating some of the costs of running a trial.
For example you can claim the cost of:
Utilities – e.g. electricity and gas used in the production process
- Clinical trial volunteer costs
Set up, or ask your finance team to set up, robust processes to accurately capture all consumables being used by all projects. This will be good for your cost management of projects in general and very useful to support robust R&D tax credit claims.
Include the cost of building data sets and cloud computing
HMRC have amended what costs can be included in R&D Tax credit claims to include the cost of building data sets and the cost of cloud computing so make sure you are capturing these costs and allocating them to projects.
Step 2: Understand and document your relationship with subcontractors
Outsourcing specialised work to subcontractors is common practice and makes sense for many companies.
The exact relationship between you and your subcontract is important. HMRC will want to know if they are providing you a service or providing you specific people to complete your project (Externally provided workers or EPWs).
Only EPWs are allowable when using the RDEC scheme for instance. (Research and Development Expenditure Scheme – applicable to larger businesses)
Within your contracts with your subcontractors, ensure there is a clause detailing exactly the nature of what they are providing. Capture this information in a central register to ensure your R&D tax credit claim is more robust.
You can claim 65% of the relevant costs of using a subcontractor for your R&D activities.
Step 3: Plan your organisational structure
Consider taking the following steps to ensure that you minimise your innovation costs by maximising your R&D tax credit claim.
Use a Limited Company Structure R&D Tax credit claims are only available to Limited Companies because R&D tax relief is set against corporation tax. Sole traders and partnership structures are not eligible.
Incorporate a company to contain your R&D activities if you are not using a limited company.
The following actions should also be considered. Applying these retrospectively is usually not possible.
Salary vs Dividends
Salaries are an allowable cost for R&D tax relief, but dividends are not. Ensure that work undertaken by owners on R&D is compensated via salary as much as possible to maximise your R&D tax credit claim. (We appreciate that other considerations may prevent this).
Recharge salary costs from group companies
If the company undertaking innovation is part of a larger group of companies, you may have staff from sister companies working on your research and development projects. Their costs can be claimed under EPWs but only if their salary costs for their work are recharged to the company undertaking R&D.
Ensure all R&D work is UK based
HMRC wants to ensure that R&D tax credit claims support work undertaken in the UK. Look at where the R&D work you are undertaking is based. Use UK based staff where possible.
It’s worth trying to use UK based subcontractors wherever possible as changes to R&D legislation will make it more difficult to claim for those based abroad in the future.
Getting expert help for your R&D claim
There is a lot to consider and take action to maximise your R&D tax relief. The work needed to maximise your claim is likely to be quicker, easier and simpler than generating the same benefit through profits and it is entirely within your control.
Getting expert help and advice when setting the above up and incorporating additional steps to maximise your claim makes sense for most businesses. Taxar Partners take a long term strategic approach to maximising your R&D tax credits claims. We work with you on a continuous basis to help you and your team set up cost capture process tailored to your business and innovation work.
With over £4m in benefit provided to our clients, exploring if we are the right partner for you might be worthwhile.
If you have any questions or what to discuss your situation, please call us on 01172 980679 or get in touch here.