The UK government understands that supporting innovation is crucial to making the UK more competitive globally. Therefore, companies taxable in the UK that are undertaking R&D work can access a cash flow advantage by making a claim for enhanced tax relief through their tax return.
With COVID-19 causing significant cash flow problems for most companies trading in the UK, we recommend all companies consider if they are undertaking R&D work as those that are can boost their cash flow through making a claim for R&D tax relief.
The government’s COVID-19 support for businesses has recognised the benefit claims for R&D tax relief can bring to companies. As a result, they have bolstered existing R&D staff numbers by redeploying personnel from other departments and ensuring home working staff have the necessary resources to maintain a 28 day turnaround for most R&D claims.
Innovation tax reliefs are available to both Small and Medium Sized Enterprises (‘SME’s’) and large companies, with the former more generous. The UK Government has also announced plans for a £1.25 billion coronavirus package to protect early stage and innovative UK businesses, you can find out more about this here.
Companies incurring expenditure on creating new products, services, materials or processes or modifying existing ones, will normally be eligible to make a claim for R&D tax relief. This is based on the proviso that the company’s R&D project(s) seeks to achieve an advance in science or technology with the qualifying R&D expenditure being undertaken to resolve scientific or technological uncertainties associated with the project(s).
SME’s enhance every £1.00 of qualifying R&D expenditure to deliver a 230% deduction from taxable profits which provides an additional £1.30 of Corporation Tax relief. The cash flow benefit comes in a number of ways from a reduction in Corporation Tax payable to a cash payment from HM Revenue & Customs (‘HMRC’) where a company makes losses and surrenders these to HMRC.
Larger companies achieve the cash flow advantage through a reduction in their Corporation Tax liability or by receiving a repayment from HMRC through the Research and Development Expenditure Credit (RDEC) Scheme.
Qualifying expenditure includes staff and subcontractor, software costs, materials consumed in the R&D process and the costs of hiring in workers to undertake innovation work. Additionally capital costs associated with creating innovation areas in premises can also qualify for enhanced tax relief.
Claims for R&D tax relief are made in the company tax return which must be submitted within 24 months of the end of the period expenditure has been incurred.
HMRC manage R&D claims and as a further COVID-19 support measure it has been confirmed: -
- late claims to support companies affected by COVID-19 will be looked on more favourably;
- R&D repayments claimed by a SME will where possible not be reduced for other tax liabilities due by the SME from HMRC e.g for outstanding PAYE/NIC;
- The proposed introduction of a cap related to PAYE from April 2020 on the R&D repayment available to an SME has been delayed; and
- Only COVID-19 related business interruption loans provided to fund R&D will affect a SME’s ability to claim R&D repayments.
However, HMRC has unfortunately confirmed there will be no relaxation of the requirement for the claimant to be a Going Concern to claim a tax payment from HMRC.
Failure to identify innovative activity will cause a company to miss out on valuable cash support from the government.
Our specialist R&D team have supported successful claims being made from a wide variety of sectors such as Construction, Technology, Oil and Gas, Food and Drink, Software and Fashion.
Therefore, we recommend all companies consider their activity and recognise their innovation. AAB’s R&D specialists will be delighted to discuss your activity and confirm whether this would constitute R&D for tax purposes and allow a claim for relief to be made.
By Derek Gemmell, Head of Innovations Tax at Anderson Anderson & Brown LLP