How can you help your client's R&D Tax Credit application go smoothly?
We have found over the years that many businesses which have tried to make an R&D tax relief claim themselves have ultimately, for whatever reason, been unsuccessful. What appeared to be a relatively straightforward application turned out not to be, and the mistake has been very expensive both in time and money.
As your client’s accountant, it goes without saying that the information you give is accurate and up-to-date so that the application process is not only smooth but successful. Confidence in your ability to not only guide your client but also to spot eligible R&D activities as they occur is paramount. It’s a whole area of expertise in itself and can be incredibly daunting - but the good news is, support is available.
To make life easier, Tax Cloud UK - developed by Myriad Associates - is a handy portal that helps you to help your clients. With a specific section for accountants, it works with your client’s own figures to create a bespoke R&D Tax Credit calculation that’s unique to their business and R&D activities.
We’re also on hand if you have any questions or need further advice; you can find our details on our contact form.
Claiming R&D Tax Credits is tricky
Although the process of making an application for R&D tax relief looks easy, there’s much more to it than meets the eye. There are very specific requirements to adhere to, with language, formatting and evidence all having to be taken into account.
The narrative and supplementary documentation is very important indeed. It must be in an HMRC friendly format complete with well-written, clear wording that demonstrates how an R&D project has met the qualifying criteria. It must also address anything in the accounts or tax calculation that may not be immediately obvious to the reviewing officer. Essentially, all of HMRC’s questions much be answered exactly, in order to stand any chance of success. If there is anything HMRC is unhappy with, it will very likely open an enquiry.
What are the potential pitfalls?
HMRC encourages businesses to claim R&D Tax Credits but also explicitly stipulates the need for the correct protocol to be followed.
There are several pitfalls that should be avoided, including:
- The submission of poor quality reports often leading to an HMRC enquiry. This can be stressful, expensive and take months to conclude
- Erroneous claims that may result in penalties of up to 100% of the relief value
- Working alongside group companies, as this can affect the ability to make a claim in the first place. Care should be taken when recharging R&D expenditure from one group company to a different group company, otherwise eligible costs may suddenly not apply. This could be, for instance, where a director’s staffing costs are recharged from one company to another but the individual is a director of both companies. In this case, such costs would not be classed as ‘externally provided worker costs’ or ‘staff costs’
Avoid any errors from the start
Before you start an R&D tax credits claim, it’s well with considering the following five most common mistakes, and how to avoid them.
1. Claims are erroneously made for ineligible expenditure
Although there’s a broad spectrum of elements that can be claimed for, there are still some projects and costs which cannot. HMRC is very specific about this.
The Tax Cloud UK portal ensures that only the relevant costs are included and nothing is missed off that shouldn’t be.
2. Project activities outside the scope of R&D included in the claim
R&D Tax Credits are offered for activities that attempt to resolve a particular scientific or technological uncertainty; it’s all about innovation in technology and science. This means that any financial or commercial steps necessary for the innovation, like market research and distribution costs for example, will be excluded.
If any aspect of this is unclear, we will be happy to go through it with you to carefully consider your client’s R&D project in its entirety, identifying which specific activities can be included.
3. Staffing costs are claimed for individuals who are not employees
Only people how have an employment contract with the business make up part of the staff costs for an R&D Tax Credit claim. However, it could be possible to claim under the Externally Provided Workers rules, or as a sub-contractor cost - we can explore this with you if required.
4. Claims are made for overheads that are not classed as consumables
HMRC tightened up their approach in this area back in April 2015. It essentially means that companies can only claim for the costs of items which are transformed or “used up” in the R&D process. These are things like materials, light and heat.
It’s vital that you extract any consumable costs which were not part of the R&D project itself - again we can support you with this.
5. Companies claim under the SME scheme when they shouldn’t (or don’t include government aid)
The R&D tax relief scheme is split into two types – the SME scheme (the more generous of the two) and the RDEC scheme. Which one a company uses mostly depends on its size, with most coming under the SME scheme (RDEC is specifically for larger organisations). However, some companies make the mistake of automatically applying under the SME scheme without considering any ‘linked’ and ‘partnership’ enterprises too.
Additionally, SMEs are not able to claim under the SME scheme if work was carried out on a sub-contract basis or where they benefitted from government aid such as an R&D grant. We make sure your client applies for their tax relief using the correct scheme and address any issues early on so there are no nasty surprises later.
Make sure your client’s R&D Tax Credit claim is successful first time
We specialise in R&D tax relief - and we know it inside out. At Tax Cloud we don’t deal with any other area of accountancy; we simply work alongside you to deal with all aspects of R&D tax relief, leaving you free to do your day job.
Why not ljoin our partner program at the Tax Cloud portal for accountants page or get in touch with our friendly expert team on 0207 118 6045. We will be pleased to assist in any way we can.