Research and development tax credits offer companies a huge opportunity to get rewarded for the hard work they put into developing an idea into reality. Getting the application right is critical, but where do you start?
If you are thinking of making a claim, here are six important steps to think about.
1 - How big is your company?
In HMRC’s eyes, companies come in two sizes: SME (small to medium) and large. SMEs tend to qualify for the more generous SME Tax Credits, while large companies will qualify for the Research and Development Expenditure Credit (RDEC) scheme.
A large company is one with more than 500 employees and an annual turnover of over 100 million EUROS, or a balance sheet over 86 million EUROS. If you fall below these levels you’ll be considered an SME.
2 - What you can’t claim for
Arguably the most important part of the process is understanding what you can and can’t claim for. This is tough to balance as you will naturally want to claim as much as possible to maximise the payout. However, getting it wrong can cost you dearly, potentially triggering a lengthy and costly HMRC enquiry.
Costs that qualify are known as ‘qualifying expenditure’ and it’s best to speak to an expert to identify the right costs to claim. Things such as expenses that fall outside your financial year will not qualify. You also cannot list your directors as subcontractors, nor can you claim directors’ dividends in your application.
3 - Is your company ‘linked’?
If your small business is part of a larger organisation, the two will be considered ‘linked’ and you won’t therefore qualify for the SME Tax Credit scheme. Linked businesses will be considered as one entity for the purposes of the application, which often means SMEs must apply for the RDEC scheme instead.
There are further rules over ‘partner enterprises’ which apply when another company owns 25% to 50% of your company. Under these conditions, the finances and employee number need to be aggregated and added to the size of the company making the claim. There are exceptions, and it’s advisable to seek clarity with experts in R&D tax claims.
4 - Have you chosen the right software project?
Choosing the right project(s) to include in your technical narrative can be difficult, particularly for software development. For instance, let’s say you’re claiming for costs incurring building a test harness for a new software algorithm. The algorithm itself may have been the attempt to resolve technical uncertainty, but it cannot be tested without the harness, hence the harness creation costs will qualify as indirect activity while the algorithm qualifies directly.
Make sure you've been granular in how you describe your projects. Covering a handful such as 3 or 4 projects in a single application will be fine, but if you end up splitting a project into a dozen micro-projects you could end up confusing your narrative.
5 - Write your best technical narrative
The technical narrative is the centrepiece of your application and is your chance to show HMRC that you’ve conducted research and development by solving technical uncertainty or advancing knowledge.
It has to be well-written, from a technical standpoint, and be kept simple. HMRC won’t appreciate jargon so leave buzzwords out of it. Asking an outsider to review the narrative is a good idea so you get an independent opinion before you submit your claim. Alternatively, contact expert technical narrative writers to help.
6 - Do your numbers add up?
Make sure your numbers add up on all your forms before you file them. If a single figure doesn’t add up that could trigger a red flag with HMRC and lead to an enquiry. Again, having experts to review your figures could prove extremely cost-effective.
If you would like to speak to an expert about these tips, or about your application, don’t hesitate to give us a call.