Over recent months we have reviewed many companies’ R&D tax relief claims and have identified a number of familiar shortcomings within claim processes. Here we consider five commonly seen areas of concern.
Company structure
When reviewing claims it is often apparent that the ownership structure has not been properly considered to decide which scheme the claim should be submitted under, i.e. for small and medium enterprises (SME) or the R&D Expenditure Credit (RDEC). There are some key thresholds that need to be considered around the number of employees, turnover and balance sheet numbers. Broadly, you can claim R&D tax relief under the SME scheme if your company has less than 500 staff, a turnover of under €100m or a balance sheet total under €86m. If you are over these thresholds the claim will be under the RDEC scheme.
But if your company has external investors or is in a group, you will also need to consider the following:
Linked companies
If the company is controlled by or controls other companies it is a linked company. For example if it has more than 50% of the shareholders’ or members’ voting rights in another company. The data of the linked companies should be added to the data from the company that does the R&D.
Partner companies
If 25% or more of a company is owned by another, or if the company owns 25% or more of another, it is a partner company. Certain companies and types of investors are excluded.
This is just a summary of a section of the rules, if you are in any doubt, please contact us to provide detailed guidance.
Sub-contractors
Consideration also needs to be given when including subcontracted activities in an R&D claim and applying the correct guidelines
SME scheme
Your company can generally claim for 65% of the payments made to unconnected parties. The subcontractor does not need to be based in the UK and there is no requirement for the subcontracted R&D to be performed in the UK. However, for financial periods beginning on or after 1 April 2023, if a company subcontracts some R&D activities, it will need to confirm that those activities are undertaken within the UK in order to claim relief. The subcontracted work may be further subcontracted to any third party. Alternatively, when the companies are connected, it may be possible to claim up to 100% of the R&D payment made to the subcontractor.
RDEC scheme
R&D expenditure subcontracted to other persons is generally not allowable for relief unless it is directly undertaken by a charity, higher education institute, scientific research organisation or health service body; or by an individual or a partnership of individuals.
Sole traders
Are not generally allowable as Externally Provided Workers (EPWs) although they could potentially be included as subcontractors, dependent on their contracted terms.
EPWs are the staff costs paid to an external agency for staff who are directly and actively engaged in the R&D project – these are not employees or subcontractors. EPWs are temporary workers provided by an external company. EPWs work like regular employees but are paid via invoice to third-party staff provider instead of being on your payroll. Relief is usually given on 65% of the payments made to the staff provider. Special rules apply if the company and staff provider are connected or elect to be connected. Again, for financial periods beginning on or after 1 April 2023 if a company engages the services of externally provided workers, it will need to confirm that the worker is paid via a UK payroll to include the expenditure in a claim for relief.
Technical report
In support of your R&D tax credit claim, you need to provide technical documentation. This is sometimes referred to as an R&D technical narrative. These terms all refer to how you describe your R&D projects, but the exact contents can vary. HMRC do not prescribe a standard format for presenting the information to support a claim. But what has become clear is that many reports are submitted with large amounts of irrelevant information with the intention of giving HMRC a “thud” factor when delivered. Avoid including boilerplate information, telling HMRC what they already know, i.e. regurgitating the guidelines relating to the schemes.
What are the key pieces of information to be submitted in a technical report?
Project case studies need to include R&D examples with sufficient detail for an HMRC inspector to understand how the projects you have undertaken have been assessed, and how they align to the R&D guidelines.
Explain your projects in layman’s terms with an outline of the technological complexities encountered in sufficient detail to support your R&D tax credit claim.
Fees paid
There have been concerns and debate on this area for many years, about the size and structure of professional fees being charged by advisers to prepare claims. It is clear from the issues outlined above identified from our recent reviews that the fees being paid by some companies are certainly out of kilter with the quality of the claim being submitted.