When speaking to North West businesses about R&D tax over the years, we have found that many owners hold the misconception that by simply submitting a claim, they are guaranteed to be successful and their business will witness great benefits.
It is important for companies to remember, however, that the success of every R&D tax claim is down to the preparation of the business and the strength of its record keeping throughout the R&D project – making sure you are on top form with this will make the review process easier for HMRC and is more likely to lead to a positive outcome.
In this blog, PM+M’s R&D tax specialist Jon Connor outlines some useful tips for businesses to think about when preparing their claim so they can achieve maximum value and the best returns possible.
1. Documentation
Documenting development projects throughout the company’s financial year ensures all qualifying R&D projects are captured.
A quarterly or bi-annual review to establish eligible projects and staff time spent on R&D activities will inevitably increase the value of your company’s R&D claim, with the benefit received able to be reinvested into future development activities and staff resources.
2. Directors’ salaries
Looking at how a company director is rewarded for their services can also significantly impact your R&D tax relief claim.
Structuring between salary, dividends and pension contributions can have a sizeable personal tax benefit. However, further consideration should be taken if your company and directors are actively involved in the development of new or improved products, processes and systems.
The corporation tax benefits as a result of an R&D claim may outweigh the reduction in personal tax liability and this should be reviewed to ensure you opt for the most tax efficient structure.
3. Prototype materials
Keeping a record of materials purchased and used during prototype design, development and testing will allow your company to benefit from a more accurate, and in most cases, increased R&D claim.
Many companies estimate their material spend due to a lack of records for materials used, scrapped or tested to destruction. Therefore, these claims are likely to be understated.
Having a more sophisticated way of monitoring your materials and the associated cost is likely to positively impact on the value of your R&D claim.
4. Contractual arrangements
Where there is a contract between persons for R&D activities to be carried out by one for the other, then the R&D activities have been subcontracted.
A contract to provide services rather than to undertake a specific part of the activities is not subcontracted R&D.
There are a variety of possible contractual arrangements and it is important to understand the contractual arrangement and role the person will play as part of the wider R&D project. The degree of autonomy, ownership of intellectual property, and economic risk are all factors to take into account.
A contract with key deliverables to a specific part of the activity is likely to constitute qualifying subcontractor activities, providing a benefit to the company claiming R&D tax relief.
5. Regular contact
Keeping in regular contact with your adviser is essential in ensuring your R&D projects remain priority.
Often companies can go 12 months without speaking to their adviser. Understanding how certain projects, funding arrangements and treatment of expenditure should be accounted for at regular intervals is again likely to increase the value of your claim and ensures a robust claim is submitted to HMRC.
