8 steps to preparing HMRC-compliant R&D tax relief claims in-house
Launching your in-house R&D tax relief process without a roadmap or strategy is an exercise in futility and frustration, yet if you do this successfully, the benefits to you and your client can be substantial.
In February 2020, the government pledged to increase public investment in R&D to £22bn a year by 2025. As a result more and more advisors are taking this opportunity to scale up their operations and help SMEs access these funds.
Focusing on running an R&D service in-house helps you take advantage of this growth, move away from risky outsourcing strategies, win new business and become a force to be reckoned with.
Tax computations and tax returns can be complex so we’ve pulled together a summary of the steps required to claim for R&D tax relief that will help you see how the two processes can knit together.
Step 1: Identify if your client is eligible
The R&D tax relief scheme is a company tax relief. The available benefit is realised through either a reduction in the company tax bill or, for some loss-making SMEs, a cash sum. The benefit is therefore only available to registered companies that are liable for company tax.
To be eligible for R&D tax relief, the claimant must be a Limited Company, and subject to corporation tax. Limited Liability Partnerships (LLPs) or Sole Traders are not eligible to claim.
Step 2: Identifying the accounting period
The timelines for claiming R&D tax credits are strict. As amendments to the CT600 can only be made for up to two years after the end of the financial year to which they pertain, a company can only go back up to two financial years when making R&D tax relief claims. This link between the CT600 and R&D tax relief also means it can be difficult to do much work on the claim costs ahead of a company’s financial year end.
Step 3: Identify which scheme
There are two schemes through which a company can claim for R&D tax relief - the SME scheme and the R&D expenditure credit (RDEC). To claim under the SME scheme, a company must have fewer than 500 staff. Any company with 500 staff or more must claim through RDEC.
The tax benefit from the SME scheme can be over 30% of the qualifying spend, while in RDEC it is around 11-13% before tax.
Depending on the company's structure (group status, shareholders as well as shares held in other companies) and grants received, it may qualify for one or both schemes.
Step 4: Identify eligible projects
In order for your client to qualify for R&D tax relief, you have to demonstrate three key things about this work:
- Firstly, that there was at least one technical goal as part of a commercial or research project.
- Secondly, that there was at least one significant technological or scientific difficulty to overcome while trying to achieve this goal.
Thirdly, that people with appropriate skills and experience worked towards overcoming the technological or scientific difficulties in the projects.
Step 4: Things to consider within the claim
Make sure you understand how your client's eligibility will be affected by the following areas:
- Acting as a subcontractor
- Competent professionals
- Challenge level
- Technical challenges
- Area of science
- Staff costs
- Clinical costs
- Subcontractor costs (SME)
- Externally provided workers
- Raw materials
For a detail overview, read chapter 2 of the WhisperClaims guide to preparing R&D tax relief claims.
Step 6: Calculate the tax benefit
Once you’ve identified the years that can be claimed for and worked out the eligible projects and costs, the next step is to work out how best to use the tax benefit from the claim and include it in the company’s tax computations for the financial year. This can depend on a whole host of factors, including whether the company had any carried-forward losses, whether it is part of a group, and whether it made a profit or a loss for the financial period in question.
Step 7: Include the R&D expenditure in the CT600
After you’ve calculated the eligible spend and how best to use the tax relief through the tax computations, the final piece of the puzzle is completing or amending the appropriate CT600. This is fairly straightforward, and HMRC have published some very good step by step instructions on how to do this in their Simple Guide to R&D Tax Relief - you’ll find them on pages 28-30. This covers both versions of the CT600, and both the SME and RDEC R&D schemes.
Step 8: Submit the supporting documentation to HMRC
Once the CT600 is submitted, you can submit the supporting documentation to HMRC. This should be sent via email to the R&D Specialist Unit using their accepted email subject conventions.
What happens after a claim is submitted?
HMRC aim to clear SME R&D tax credit claims within 28 days, and are currently meeting this target in 95% of cases. The processing time for other claims is variable, and can depend on the supporting documentation and whether other areas of the company’s tax return are assessed alongside the R&D claim.
In a very small number of cases (less than 2%), HMRC assesses the claim and asks more questions about the projects, the costs or both. This is usually heralded by the arrival of a letter telling the company that their R&D tax relief claim is under assessment, followed up by a further letter some time later with specific questions and a deadline for submitting a response. Each enquiry is unique and requires a tailored response, but can be a great learning opportunity and a chance to get an insight into HMRCs current thoughts on the scheme.
Get to grips with the fundamentals of the R&D tax relief scheme
Download 'The accountant's game changing guide to preparing R&D tax claims in-house'. A 30-page comprehensive guide written by R&D experts and designed for accountants and consultants looking to build robust in-house claims processes.
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