Can Charities And Subsidiaries Of Charities Claim R&D Tax Relief?

7th Feb 2020
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During our two decades as R&D tax relief specialists, we have worked with organisations across a broad spectrum of innovative sectors and industries. Charities in particular spend large amounts of resource in looking for ways to raise awareness, encourage donations and maximise their social benefit, all whilst reducing costs. Many also want to know about achieving the best return on investment from their subsidiaries.

Charities don’t pay tax - why would they care about R&D tax relief?

Charities themselves indeed do not qualify for R&D tax relief, however there was a period of time between 2013 and 2015 when they could, using the RDEC scheme. However, HMRC stopped accepting R&D tax relief applications almost 5 years ago, citing a desire to support business growth only. Notably, the change doesn’t affect charity trading subsidiaries.

Historical background

The Research and Development Expenditure Credit (RDEC) scheme was launched in 2013 to encourage larger, more established businesses to innovate and grow. It was never aimed at charities (or educational establishments) although HMRC did start to receive applications. Then deemed to go against the spirit of the policy, the legislation was therefore amended to ensure that money was funnelled towards operating companies only. However, the amendment does not affect split-off companies or work undergone by subcontractors; it’s only in relation the charity’s own independently undertaken research activities.

What’s the difference between a charity and a subsidiary?

A trading subsidiary typically describes a subsidiary company that is entirely owned by a ‘parent’ charity. This is most often a non-charitable, limited company with one or more directors. The parent charity will usually endeavour to retain some operational control by hiring and firing the directors as it sees fit.

Why might a charity use a subsidiary?

There are a number of different reasons why a charity may decide to set up and run a subsidiary. They may be used in fundraising activities or marketing, or have assets which are separate to the charity’s own assets. A subsidiary may have its own vehicles for example.

Gift Aid

Trading subsidiaries use the parent charity’s donations under corporate “Gift Aid” to make as little of its profit subject to tax as possible, sometimes reducing the bill to zero. This then begs the question, if charity subsidiaries are effectively able to use Gift Aid to pay no tax at all, again why would R&D Tax relief be of concern?

The answer is because R&D tax relief - regardless of whether it is claimed using the SME branch of the scheme, or RDEC - can bring about a reduction in the Gift Aid payable, or a cash lump sum.

Long term debt funding

It’s not particularly easy to fund a charity trading subsidiary and many are financed by long-term debt. This debt can either be courtesy of the charity itself, or from another external funding source. This debt needs to be serviced, meaning that profits must be retained in order to do so. This requirement to retain profit to pay debt means that full Gift Aid cannot be paid, hence there will be tax liabilities - and where there’s tax liabilities there’s (potentially) R&D Tax Credits.

How much can a subsidiary claim in R&D tax relief?

Broadly speaking, profitable SMEs that are successful in receiving R&D Tax Credits can reduce Gift Aid payments required by 130% of eligible expenditure. This then allows the subsidiary to keep hold of profits which can subsequently be reinvested into further benefitting the charity. The RDEC scheme - used by subsidiaries of larger charities - can reduce Gift Aid payments by up to 44% of the eligible R&D expenditure.

Loss-making subsidiaries don’t miss out either. Losses can be carried forward for use in the next tax year instead, or they can be surrendered for a cash refund. For SMEs this stands at 33%, and at 9% for larger organisations.

Has your client carried out work that may attract R&D Tax Credits?

As your client’s trusted company accountant, you’ll know that offering a fully comprehensive service is not just about providing accurate tax returns and answering panicky questions. It’s also about being proactive, and considering what your clients’ next beneficial move might be before they’ve even thought of it.

This is certainly the case with R&D Tax Credits, as the relief can be worth a many thousands of pounds - but many organisations still haven’t heard of it. It’s not just for medical, scientific or medical companies either; the scheme is in fact open to everyone. As long as a scientific or technological uncertainty has been addressed, whether it be by creating a new product/service or updating an existing one, then R&D Tax Credits may well be applicable.

I’m a fully qualified accountant - why would I need an R&D tax specialist?

R&D tax relief is a very niche, highly specialised area of accountancy, and putting together a claim can be extremely challenging. There are many grey areas around what an organisation can or can’t claim for, and it’s not just a case of presenting expenditure, but also on proving why you believe that expenditure is eligible.

It’s vital your client’s claim stands up to HMRC scrutiny, otherwise they could well end up either missing out on a lot of money, or worse with an HMRC enquiry. This is why it’s so important you collaborate with R&D tax relief specialists such as ourselves, so that you can assist your clients accurately.

Why we recommend working alongside us at Myriad Associates

At Myriad Associates our team deals only with R&D tax relief and no other form of business accounting. This means that over the years we have become highly skilled professionals in this field, and our technical knowledge is second to none.

Having collaborated with a large number of company owners and business accountants alike, we know exactly what it takes to put together a fully optimised R&D tax relief claim. This means you can be safe in the knowledge that your client is getting the very best service - leaving you to get on with the day job.

If you’d like to know more about R&D Tax Credits and how we can work alongside you, call us today on 020 3994 2449 or use our contact form and a member of our team will be pleased to help.