HMRC seek to promote innovation and economic growth via generous Research and Development tax credits (R&D) for Companies where innovation is high and there has been an investment in research and development of new processes, products or services. For a growing Company this relief can be extensive and extremely beneficial by either crystallising into either:
- a cash rebate on the money spent on R&D; or
- A significant reduction of Corporation Tax payable.
What is on offer?
The Research and Development Tax Credits relief is essentially summarised as follows:
- You can claim an additional 130% of qualifying R&D expenditure under the SME scheme: What this means is that if you spent £100,000 on qualifying Research and Development activities, you would be able to deduct an additional £130,000 of costs when calculating your profit subject to Corporation Tax. At current 19% rates this would equate to a tax saving of approximately £25,000. Relief can be set against current year profits or enhance losses to be carried forward and set against future profits.
- You can cash in reliefs: Of course, for many growing businesses that are also investing in innovation, cash is key and many businesses we work with choose to cash in their relief. A cash rebate is paid out a rate of 14.5% if the surrenderable loss after adjusting for the enhanced Research and Development relief. This cash relief can form an important part of the working capital strategy for a growing business.
- Claim can be made up to 2 years from end of accounting period and can be retrospective if CT return is already filed: If you have qualifying Research and Development activities you can make a retrospective claim going back 2 years from the end of your last accounting period. So a business with a 31 December 2018 year end could make 2 claims for 2018 and 2017 as long as the latter is filed with HMRC by 31 December 2019.
- RDEC scheme can also on occasion supplement grant supported projects with further reliefs and rebates: The SME scheme is not available for Companies that are also getting grant assistance towards Research and Development projects. However the larger company scheme can pay out an additional cash credit known as RDEC. This can further supplement the working capital with grant income.
Research and Development Tax Credits – a Nuvem9 Case Study
Many of our clients have made successful Research and Development Tax Credits claims and at the time of writing we have been involved in a 100% success rate with clients, generating almost £1million of cash rebates in the past 5 years.
One of our clients operates in the Software as a Service sector and undertook a significant project over 24 months to upgrade and expand its core product. The work was completed in house by a team of develops with existing clients being used for market research and beta testing purposes. The client engaged Nuvem9, who in turn contracted a R&D specialist to assist with the technical report on the claim. Nuvem9 prepared the cost schedules on qualifying expenditure after agreement on same with the client and the R&D specialist.
The results from the 1st accounting period claimed were:
- Qualifying costs identified – £207,972
- Enhanced Expenditure: £259,965
- Cash Repayment from HMRC = £210,075 (resulting from R&D reliefs and reclaiming overpaid tax in earlier period once R&D relief had been set against that period)
The client has continued to innovate and has subsequently reclaimed cash repayments of circa £100,000 in the following 2 accounting periods.
What is required to make a Research and Development Tax Credits claim?
In order to make a successful claim the following elements are essential to accompany your Corporation Tax Return.
- Document covering the Technical Detail of Research and Development, highlighting the technical uncertainties that are indicative of the innovation and speculative research
- A computation showing the costs incurred, claiming only for the Research and Development elements of the projects
These reports are attached to the online Corporation Tax return we file with HMRC.
How do Nuvem9 help?
Nuvem9 work only with specialists when compiling the Research and Development Tax Credit claims. They work only on Research and Development Tax Credits and are experts in the legislation. Our specialist subcontractors charge a fee only if a claim is permissible ensuring we and they have no conflicts of interest in pushing forward a claim that will be rejected or queried by HMRC.
In addition, Nuvem9 work with these partners on your behalf ensuring that the work required by you is no more than a meeting to discuss and qualify the Research and Development project. This allows us to maintain control of your Corporation Tax return and prepare the numbers needed; the specialist Partners prepare the technical report and liaise with any questions HMRC may have.
Using Research and Development Tax Credits for Cash Flow planning?
Claims can be made at the end of an accounting period. Nuvem9 can both assist with the claim but can also generate bridging finance ahead of a Research and Development tax rebate being realised. Innovative software businesses are using their speculative, Research and Development efforts to grow and careful planning and scheduling of the Research and Development reliefs can extend cash runways considerably.
Our virtual accounting departments also provide a means to review cash flows over R&D projects ensuring the timing of claims and bridging finance needed can be scheduled in to minimise impact and costs.