HMRC R&D definition may limit value for business

As has been shown over the past 11 years since the scheme was introduced, the HMRC definition of what qualifies and how to identify it may not correspond with a company's maximum allowable claim. See our analysis of this scheme at Research & Development Tax Credits Ltd for more details.

In essence this seems to be a good idea, but as the above commenter suggests, HMRC may not be as pro-active with your Research and Development tax credit claim as a Chartered Tax Adviser might.

As you say in the article, a second opinion is very important.

This is a good idea for SMEs who don't have the financial strength to find their way through the detailed legislation and cannot commit to the high fees sought by professional advisors to manage a claim on their behalf.

"SME companies who are not in profit may be entitled to a cash payment worth 25% of money spent on R&D from April 2011, and 24.75% from April 2012. "

This is of course of no benefit at all to those micro-companies whose R&D is done by the companies' founders foregoing salary. There is minimal quantiifiable expenditure because the company simply doesn't have the money to spend. Useless.

Such companies also, usually, fail to qualify for R&D grant funding from conventional sources such as the Research Councils and even if they do qualify, they come way below universities in the pecking order. You really really have to be motivated to start up a computer business in your garage, because nobody is going to help you!

Our company claimed R & D relief. 

HMRC then corresponded with our advisers at length.

Result: The claim was allowed. 

The cost of satisfying HMRC exceeded the value of the relief. The Chairman decided that no  claims would be made in future on the grounds that time and effort were better spent on manufacturing and exporting than in fruitless discussions with public servants. 

For information - we design and manufacture state of the art high technology equipment; 85% of production is exported; 30% of production has been exported to China in recent years..

Silicondale - you are completely correct.

Although from 2012 the PAYE & NI cap on receiving a tax credit will be removed, this will not help companies that have no R&D expenditure because they are funded by sweat equity. Nonetheless it is a move in the right direction.

Easy for me to say I know but, assuming your claim was genuine R&D, that just shouldn't happen.  I've dealt with many claims and bill a small upfront fee, then a %age of tax saved.  If the claim fails (none have yet), then only the upfront fee is paid.  If it succeeds, the client has to be better off.

I would avoid handling an R&D enquiry through correspondence as much as possible.  Facilitating a meeting between HMRC and the company's lead R&D staff is far more efficient, in my experience.

I must ask though - having presumably established the principle with HMRC that the company is engaged in qualifying R&D, why on earth would you abandon R&D claims now?  Accepting there's been a net cost in year one, aren't you now in a position to benefit in future years?  Unless you're constantly changing the nature of your R&D work, you aren't going to experience an HMRC enquiry every year.  A good R&D adviser would explain that R&D shouldn't necessarily be seen as an immediate win; it's a long term relief and sooner or later you should expect to have to justify your eligibility to HMRC.     

C J Maslen - I would agree with dwgw. However, can I also apologise on behalf of the rest of us in the profession for the apparent lack of commerciality shown by your tax advisers. I am frankly astounded that they would think it was acceptable to spend your money in this way - surely they could just have pulled the plug and advised you to forget the R&D claim.

It's no wonder that many firms charge for such work on a percentage of the tax saving these days. That way, the client takes no risk and can only end up better off by making a claim for tax relief.

Obviously, you have had an unfortunate experience.  Sometimes it is best to move away from your current advisers if, like R&D, it is a very specialised area.  There are ways and means of avoiding such situations.  We prepare detailed reports in advance of the claim which are then agreed by HMRC, or queried, our fee ( which is contingent on success and is restrictted to a fixed percentage of what you get back so can never be more than the relief) includes dealing with HMRC.queries.  I would encourage your chairman to relook at the R&D which we also be relevant when the Patent Box tax rate  is introduced in 2013.  The patent box rate is proposed to be a 10% tax reate on profits attributed to products which are patented or include something which is patented ( although it is actually not as straight forward as that ).

"If the company uses the calculations agreed with HMRC their claim will normally be accepted as accurate, unless a significant issue arises...."

i.e. please help us by highlighting to us in advance all the tax-payers where we have a chance of big dis-allowances.

and ...."will normally be accepted as accurate, unless a significant issue arises"

significant issue arises = AFTER you have spent the dough, and perhaps you then being told that because the project didn't conclude on a Tuesday when there was a blue moon, the tax relief is incorrect......

they really have to think of genuinely neutral ways of helping rather than 'helping' ??

Thank you all for your comments, which are appreciated.

Our level of R & D activity fluctuates greatly from year to year

We might well revisit the question of R & D claims under the present regime.  This will be based on our usual time and benefit (and risk) evaluation.

Nevertheless, we are  reluctant to engage in negotiations with parties who do not have to account for the time spent.

In the meantime, we continue to manufacture and export.

I've followed the link to find out more about contacting the HMRC small R&D unit. The web site tells me our's is in Leicester but I can't find an address or telephone number on the HMRC site. I've tried contacting out local CT tax office and they've told me it is all now dealt with by the "Large and Complex cases" unit in Cardiff but the telephone number is always engaged.

Can anyone provide me with the necessary contact details for the small R&D section?

You need to contact the following:

Cardiff R&D Unit (Wales, Scotland and Northern Ireland) 
14 West, Phase 2
Ty Glas
Llanishen
Cardiff
CF14 5FP
Telephone 029 2032 7003