Since Brexit and the Covid-19 pandemic, companies across the UK have been offered increased business support through government grants. The Department for Business, Energy & Industrial Strategy has reported on the amount of funding allocated to SMEs through both the Small Business Grants Fund and the Retail, Hospitality and Leisure Business Grants Fund. From December 2020 to August 2021, close to 1 million businesses were eligible to receive funding from these grants, with more than £11bn being claimed across both funds when the schemes closed earlier this year.

The SME R&D tax relief scheme in the UK is classed as notified state aid, which is a form of government funding regulated by the European Commission. To prevent companies from claiming aid for the same project from multiple sources, the government has placed certain limitations and restrictions on how R&D tax credits interact with other grants.  

As a result of the nature of these grants, and their recent prevalence, it is valuable for accountants to be aware of how they interact with R&D tax credits. For example, if your client is looking to expand and develop their business, they will likely be looking for multiple funding sources. They might have accepted grant funding without considering how it will affect their eligibility for receiving other financial benefits, such as R&D tax credits. The good news is that this does not necessarily disallow them from claiming R&D tax credits in the current year or in  the future.

The effect of notified state aid

State aid is defined as an advantage that is selectively given by public authorities using state resources. While these ‘advantages’ are broad in scope, they are typically subsidies or aids businesses cannot obtain on the open market. 

Rules around state aid are outlined by the European Commission to prevent the potential distortion of competition and trade. However, since the Comprehensive Free Trade Agreement between the UK and EU came into effect on 1 January, rules around subsidy control are changing. EU rules still apply when aid is granted within the jurisdiction of the Northern Ireland Protocol or if there has been a disbursement of outstanding Structural Funds payments. 

As these are corner cases, we’ll focus on what these relatively new rules mean for your client.

The UK is currently bound by international commitments on subsidies due to its continued World Trade Organisation (WTO) membership. For the purposes of economic fairness, public authorities are limited to giving out one form of notified state aid per project. In addition, there is guidance from the WTO on the characteristics of subsidies, which you can read on the gov.uk website.

Government grants and the SME scheme

As previously mentioned, the SME R&D tax credit scheme is classed as notified state aid, mainly because of the high percentage of relief offered by the scheme. This means notified state aid grants have the potential to conflict with your client’s SME claim, however, this will hinge on how the funding has been separated between people and project costs.

For the purposes of R&D tax credits, the funded portion of a businesses’ projects that are funded by non-state aid grants must be claimed through the RDEC scheme. However, the rest of an R&D project’s qualifying expenditure can be claimed through the SME scheme as normal.

Government grants and the RDEC scheme

Unlike the SME scheme for R&D tax credits, the RDEC scheme does not count as notified state aid. This allows companies to claim for qualifying R&D costs that have been subsidised by government grants. SMEs (i.e. enterprises with fewer than 500 employees, plus a turnover of under €100 million, or gross assets of less than €86 million) can also use the RDEC scheme to claim for subsidised costs they wouldn’t have been allowed to claim through the SME scheme. 

According to HMRC, SMEs can claim for R&D expenditure disallowed by the SME scheme if:

• The expenditure in question would have qualified for R&D tax relief if the SME was a large company.
• The only reason for the expenditure not qualifying under the SME scheme is because it was subsidised by grant funding. 

The RDEC scheme also allows for corner cases within certain grant schemes, whereby your client may be able to access finances for parts of expenditures. We discuss this on a case-by-case basis further down.

Grants that do and don’t work with R&D tax credits

When determining how a grant will interact with R&D tax credits, you’ll need to ask the following two questions:

• Is it categorised as notified state aid?
• Have the funds been used to directly finance your client’s R&D project? 

If the answer to both of these questions is no, R&D tax credits should be claimable alongside the grant you’re looking at. Note that the actual amount of funding received does not influence the compatibility between grants and R&D tax credits.

Types of government funding

Many of the following examples are major sources of government funding brought about by the effects of Covid-19 business restrictions. They could potentially conflict with R&D tax credits, but this won’t always be the case. As such, we advise talking with your client to establish exactly how these grants have been used.

Future Fund

The Future Fund is delivered by the British Business Bank and provides support to UK businesses with a turnover of between £125,000 and £5 million. Although the scheme is now closed to applications, at the end of August 2021, 158 of the loans had been converted into equity shares. This shows the potential for the Future Fund to raise additional private sector capital for your client. 

Funds provided by the Future Fund are not notified state aid. SMEs, therefore, are allowed to claim R&D tax benefits for non-funded portion of a project.

Recovery Loan Scheme

Launched on 6 April 2021, the RLS is designed to aid businesses with post-pandemic recovery and growth. Even though the RLS scheme is classified as notified state aid, your clients R&D tax credits claim won’t be affected. To be eligible, your client will have to prove their business’ viability before the pandemic and how it has been adversely affected since then. They must also not be in collective insolvency proceedings. You should be prepared to take out extra debt finance on behalf of your client as a result. 

Lenders providing RLS support can give up to £10 million in the form of:

• Invoice finance
• Term loan
• Asset finance
• Overdraft

As the borrower, you will have 100% liability for RLS debt. Also note that if your client borrows more than £250,000, the lender can choose to take personal guarantees. These come with the following caveats:

• No personal guarantees can be taken over Principal Private Residences.
• Past £250,000, the maximum amount that can be covered is 20% of the outstanding balance of the RLS facility (this is after the business asset proceeds have been applied). 

In the 2021 Autumn Budget and Spending Review, the HM Treasury announced that the Recovery Loan scheme would be extended for six months until 30 June 2022. However, from the start of 2022, the following changes will apply:

• Funds will only be available for SMEs.
• Finance will be capped at £2 million per business and £6 million per group.
• Guarantee coverage for lenders will be reduced to 70%.

HMRC says businesses that have received funding through other coronavirus loan schemes, namely the Coronavirus Job Retention Scheme and the Coronavirus Business Interruption Loan Scheme, can still claim the RLS. Find the list of accredited lenders currently offering funding through the RLS here. 

CBILS loans and RLS loans are both categorised as notified state aid, so if they are used towards the R&D activity this could reduce the benefit received on the funded costs. 

It is worth noting that HMRC have stated that RLS loans will not be treated in this manner when it comes to their overlap with R&D tax relief, in spite of their state aid status. This is not the case for CBILS loans, which will continue to be treated as state aid when used for R&D expenditure.

Coronavirus Job Retention Scheme (furlough)

The Coronavirus Job Retention Scheme (CJRS) is not a form of notified state aid. Instead, it is classed as a subsidy. Because workers on furlough are not contributing to relevant R&D work (by virtue of them not working at all), HMRC expects these costs to be omitted from R&D claims.  

However, HMRC recognises that holiday and sick pay are a valid aspect of R&D costs as they form a part of employees’ working time. As such, HMRC will allow any period during furlough taken as annual or sick leave to be included in staffing cost calculations.

Coronavirus Statutory Sick Pay Rebate Scheme

With this scheme, employers can recover two weeks’ worth of statutory sick pay for workers affected by the coronavirus. This is notified state aid and so cannot be claimed alongside R&D tax credits. Take care to make the distinction between this scheme and the CJRS.

Coronavirus Business Interruption Loan Scheme

Although it closed to applications in March 2021, the CBILS operated within similar parameters to the Recovery Loan Scheme, both in terms of facilities and lender guarantees. Its lenders offered up to £5 million to businesses that saw their cash flow disrupted and lost revenue as a result of Covid-19. 

The Coronavirus Business Interruption Loan Scheme (CBILS) is classed as notified state aid, but it will only get in the way of R&D tax credit claims if it is specifically used to fund an R&D project. 

Bounce Back Loans

The ability to claim Bounce Back Loans (BBLs) also came to a stop in March 2021. SMEs were able to use BBLs to borrow between £2,000 and 25% of turnover, with the maximum loan being capped at £50,000. 

BBLs are a form of notified state aid. However, it will only interfere with an R&D tax credit claim if the funds directly contribute towards R&D projects. As this funding was meant to deliver all manner of financial support, your client may still be able to benefit from R&D tax credits.

De minimis aid

A grant is classed as de minimis aid if it provides less than €200,000 over a three-year period. De minimis aid, although typically lent by government structures. It is treated muhc like non-notifiable state aid, where the funded portion of a project will have to be claimed through the RDEC scheme, and the reamined can be claimed through the SME scheme. The EU’s innovation grants given out under the Horizon 2020 scheme is an example of de minimis aid.

Example: Notified state aid applied to an R&D project

Let’s take a look at an example of where notified state aid is applied to an R&D project. Your client may be faced with this scenario as a result of receiving project specific aid, such as funding from Innovate UK and GBER. Project specific state aid is funding that a business must allocate towards a certain project. This will mean the business can only claim R&D tax relief through the RDEC for that project.

Say the business has received a grant of £500,000, which they choose to invest in an R&D project (1), alongside £750,000 of their own money. At the same time, they invest a total of £1,500,000 in two other projects that are eligible for R&D tax credits. 

Take a look at the R&D tax credit values that would apply:

Project	Capital Investment (£)	Grant Investment (£)	SME relief rate*	RDEC relief rate	R&D tax credit value (£)
1	750,000	500,000	/	13%	162,500
2	1,000,000	0	33%	/	330,000
3	500,000	0	33%	/	165,000
Total	2,250,000	500,000	/	/	657,500

So as a result of a total investment of £2,750,000, the company receives an R&D tax credit of £657,500. This gives an aggregate relief rate of almost 24%.

* This is the maximum possible relief rate offered by the SME scheme, this can vary depending on the expenditure and financial position of the business.

What should you do with this information?

Although some of these grant schemes have closed, they can still impact R&D tax credit claims because these can include projects from up to two years before the claims are made. It’s a likely scenario that your client will have R&D projects funded by both notified state aid and non-notified state aid.

While the percentage return on R&D work is less generous through the RDEC scheme, it is certainly still beneficial. Note that 33% is the maximum possible gain on investment through the SME scheme. Whether your client reaches this value depends on their financial position and the nature of the qualifying expenditure included in their claim.

Related: Most common overlooked expenses when making an R&D tax claim

State aid, notified or not, is aimed at benefiting businesses. Funding can be used for cash flow management, investment opportunities, and/or efforts to drive growth. 

Determine the best course of action with made.simplr

When R&D tax credit claims are maximised, the financial benefits can be substantial compared to other sources of government aid. With made.simplr’s software, your claims will be easy and accurate. In addition, our R&D tax experts are happy to provide guidance on how grants can affect your clients’ claims.

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A business in loss doesn’t necessarily mean that it’s failing. Startups, for instance, often experience a spending deficit to get off the ground and fund long-term investments. Data published by the ONS in August 2020 revealed almost 16% of UK businesses were experiencing costs greater than turnover, a further 13% said they were breaking even, and nearly 27% weren’t sure of their financial position. 

Many businesses believe R&D tax relief is reserved only for profitable companies and so miss out on the benefits. In truth, the SME tax relief scheme aims to support loss-making businesses by granting R&D tax credits as a cash injection. 

HMRC provides R&D tax credits in exchange for the business surrendering its losses. However, surrendering losses carries an opportunity cost that might not always be in your client’s best financial interest. As your client’s accountant, it pays to be aware of their expected financial needs to get the most out of their R&D.

How losses are useful for UK businesses

Losses can be financially valuable thanks to the extended loss carry back rules for businesses.

The Finance Act 2021 provides a temporary two-year extension to the timeframe outlined in these rules. It applies to accounting periods that end between 1 April 2020 and 31 March 2022. 

Thus, carry back rules have broadly been extended from one previous year to three previous years. Companies can use any unused balance of the losses from an accounting period, as long as the business remains in the same trade for 12 months. If an accounting period doesn’t fit neatly within this period, the profit that can be offset is apportioned accordingly. 

Losses are also flexible in how they’re utilised as they can be brought forward to future accounting periods. Trading losses carried forward can be offset against subsequent trading profits or the total profits of an accounting period. However, if the business’s profits exceed £5m, there are limitations to the amount that can be offset. If this is the case, no more than 50% of these profits can be covered by carried-forward losses.

Related: The myths around R&D Tax Credit costing you money

What does it mean to ‘surrender losses’?

When companies experience losses, they’re not excluded from claiming R&D tax relief. The SME R&D tax relief scheme allows these companies to claim a tax credit in exchange for their losses. This grants a cash credit worth 14.5% of the total of losses surrendered. 

Let’s look at an example of how this works:

Your client has a total expenditure of £75,000. 

£50,000 is qualifying R&D expenditure, so it experiences an uplift of 130% under the SME scheme. As a result, £50,000 x 130% = £65,000. 

The company had a loss of -£25,000, and this is enhanced by £65,000 for a total of -£90,000 in loss for tax purposes.

The value of the R&D tax credit is based on either the total uplifted loss or 230% of the qualifying R&D expenditure (£115,000), whichever turns out to be the lower value.

Therefore, the cash credit is calculated using the uplifted loss: £90,000 x 14.5% = £13,050. 

If the company decided instead to carry forward the enhanced loss, they’d receive a benefit of reduction in future corporation tax of £90,000 x 19% = £17,100. The trade off being that no cash is received immediately, and the benefit is only experienced once the company has enough taxable profit.

The case for and against both options

The main appeal for surrendering losses is that your client can claim R&D tax credits, which offer a short-term cash injection. Receiving a cash sum is the most flexible form of financial benefit, as the company can use the money where it makes most business sense. HMRC aims to provide R&D tax credits within 28 days of filing; failing this, they’ll contact businesses regarding their claim within this period. 

However, there are benefits to holding onto losses, one of which is the ability to capitalise on past successful years. The benefit comes as a repayment of tax already paid. Therefore, in periods where tax rates have been falling, carrying losses back to previous Corporation Tax rates will grant a greater repayment. Loss carried back can also come with a small interest repayment from HMRC. Companies that are part of a group but that don’t have a previous profitable period to utilise can transfer the loss to a profitable group member.

Carrying losses forward also allows profits in future accounting periods to be offset. Losses incurred in accounting periods before 1 April 2017 can only be used against profits from the same trade. Beyond this, losses can offset total profits. While this encompasses most forms of loss, HMRC outlines rules for accountants to consider when carrying the different types of loss forward.

Our advice

Start by considering whether your client will likely become profitable by the end of their next accounting period. It’s worth getting involved in discussions about their business roadmap to determine this. With the right information on hand, you can make an informed decision regarding the surrendering of losses. 

Holding onto losses is only advisable when there are profits that can be offset against it. If your client doesn’t expect to be profitable in the next few years, and they weren’t profitable in the past three years, R&D tax credits in cash are likely the best option. As demonstrated in the above example, the total R&D expenditure will impact how their R&D tax credit is calculated. Therefore, it’s critical to have a clear understanding of how much qualifying R&D work your client has undertaken during each accounting period. 

In addition, if your client is a fast-growing business, having cash in the short term could lead to a higher return on investment over time. If this is the case, the 14.5% cash credit could generate more value than the carried over losses, and the R&D tax credit option is more appealing. 

Finally, startups can benefit from surrendering their losses before they’ve paid HMRC any form of tax, so it’s critical to check in with your client on this.

Read more on how to claim R&D tax credits for startups

Get in touch with made.simplr

Let the experts help! Making accounting decisions, such as surrendering losses or claiming R&D tax credits, often involves analysing a substantial amount of business data. With made.simplr’s online R&D tax credit platform, you’ll be able to access your client’s figures through Xero integration and, from there, apply it directly to completing R&D tax credit claims. 

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The UK government currently offers businesses two types of incentives to do Research & Development (R&D): 

• R&D tax relief (which includes a tax deduction or R&D tax credits), and 
• Research and Development Allowances (RDAs).

While much of the focus in our blogs has been on R&D tax credits, it’s important to discuss the value of the often overlooked RDAs and how, when combined with R&D tax credits, they can offer significant savings.

What are RDAs?

RDAs are a specific form of capital allowance for research and development capital expenditure. UK businesses qualify for a 100% tax deduction on these expenses in the year they’re incurred and there’s no limit on the amount that can be claimed. The total qualifying costs are deducted from your client’s taxable profits, reducing the company’s corporation tax.

Other types of capital allowances

There are a few types of capital allowances that provide tax relief for UK businesses. For each, a set number of conditions must be met before a business can claim tax relief. In addition, each type of capital allowance qualifies for tax deductions at differing rates. For example, Plant and Machinery Allowances (PMAs) allow for an 18% deduction each year. 

Then there’s the Annual Investment Allowance (AIA), which was introduced in 2008 to stimulate economic growth in the wake of the financial crisis. The AIA allows UK businesses to deduct the costs of purchasing equipment from their taxable profits. Currently, the limit on the amount of qualifying capital expenditure that can be used for the allowance is the highest it’s ever been at £1m. The government’s 2021 Budget and Spending Review recently announced this limit would be extended until April 2023. 

The main differences between RDAs and AIAs are as follows:

• Limits to the amount businesses can claim: With AIAs, there’s a limit to the amount of tax relief companies can claim; with RDAs, there isn’t. 
• The types of expenditure claimable: While AIAs include plant and machinery, office equipment and fixtures, RDAs offer a wider range of qualifying expenditure. We go into further detail in the paragraph below, but it includes many capital expenses related to R&D, with the exception of land and intellectual property. 

All capital allowances, including PMAs, AIAs and RDAs, are claimed on your client’s tax return. 

What expenditure can your clients claim for RDAs?

According to the HMRC Capital Allowances Manual, qualifying expenditure is capital expenditure that a trader incurs on R&D directly undertaken by the trader or on the trader’s behalf provided that:

• the R&D is related to a trade that the trader carries on; or
• the trader sets up and commences a trade connected with the research and development.

Examples of capital expenditure that qualify for RDAs include:

• Building facilities for R&D. For example, a building that features an R&D centre will qualify for capital allowances if the R&D facility makes up at least 75% of the building’s total cost.
• Laboratory equipment.
• Plant and machinery (P&M).
• Company vehicles for staff working on R&D projects.
• Any equipment, IT systems, or facilities that have specifically been purchased for the purposes of R&D.

Example calculation for RDAs

To illustrate how much your client can benefit from RDAs, let’s use the example of a business that’s just invested in upgrading the space in which they run their R&D operations.

Capital allowances without RDAs

	Capital expenditure (£000s)	Annual Investment Allowances (AIAs) (100%)	Plant and Machinery Allowances (PMAs) (18%)	Total non-qualifying expenditures (£000s)
Land	500	/	/	500
Plant	150	150	/	/
Equipment	1000	850	27	/
Fixtures and fittings	100	/	18	/
Building	250	/	/	250
Total capital allowances	2,000	1,000	45	750

The total deduction here is the AIA and the PMA added together, which equates to £1,045,000. With corporation tax at 19%, this translates into an overall tax saving of £198,550.

Capital allowances with the inclusion of RDAs

	Capital expenditure (£000s)	Annual Investment Allowances (AIAs) (100%)	Research & Development Allowances (RDAs) (100%)	Plant and Machinery Allowances (PMAs) (18%)	Total non-qualifying expenditures (£000s)
Land	500	/	/	/	500
Plant	150	150		/	/
Equipment	1000	850	150	/	/
Fixtures and fittings	100	/	100	/	/
Building	250	/	250	/	/
Total capital allowances	2,000	1,000	500	0	500

With RDA included, the business benefited from a more significant tax deduction (£1,500,000). This translates into a tax saving of £285,000 and, therefore, an additional benefit of £86,450.

How do RDAs complement R&D tax credits?

It’s important to be aware of how RDAs differ from R&D tax relief and how the two incentives can interact to benefit your clients’ businesses.

As we’ve explained above and in previous blogs, RDAs relate to expenditure on fixed assets, while R&D tax credits relate to operational costs, namely contracting, materials, and staff costs.  

HMRC is consistent in its definition of R&D across the RDA and R&D tax relief schemes. If your clients’ R&D projects fit this definition, they’re likely to qualify for the benefits of both. Note, however, that businesses only qualify for RDAs if they’ve invested in capital assets in their pursuit of R&D. Your clients also cannot claim R&D tax credits and RDAs on the same expenditure.

When used together, R&D tax credits and RDAs can help your clients generate a scalable R&D benefit that boosts their cash flow. RDAs share a similar claims schedule with R&D tax relief, so it’s usually best to claim for both at the same time.

Let’s look at an example of how a business can benefit from using both schemes:

As in the earlier example, this hypothetical company is expanding its existing, dedicated R&D building. They’ve acquired £300,000 through successful R&D tax credit claims, and they’re now constructing a new research facility. 

The total investment is broken down as follows:

• £150,000 for construction work
• £150,000 for equipment
• £70,000 for labour

As mentioned before, building costs don’t qualify for capital allowances. However, the equipment costs can be deducted in full using the AIA. 

If the business consulted an R&D tax specialist, they would have realised that part of the build-costs could be eligible for RDAs , as the building is going to be used for this purpose. As a result, an additional £50,000 of these costs can now be deducted,  creating a further tax saving of £9,500. 

According to the business’s R&D tax advisor, the labour costs involved in setting up and checking the equipment will qualify for R&D tax credits. . The R&D tax relief for the labour costs incurred can grant an additional benefit of at least £17,290. Wages for staff working on R&D projects don’t count as an RDA, so R&D tax credits help fill this gap. 

Due to the varied nature of most businesses’ capital expenditure, your clients’ capital expenses are likely to fall into more than one category. If you know what to claim for, as well as how R&D tax credits and RDAs can complement each other, you can help the SMEs in your care to maximise their claims.

Get in touch with made.simplr

With the help of specialised R&D tax credit software, you can easily maximise your clients’ claims. Our software is fully integrated with Xero accounting, making it simple to connect your clients’ financial data and add an R&D-related claim. This increased efficiency and organisation can help your client scale their R&D practices, thus allowing more capital assets to be brought into future AIA and RDA claims.

Ready to get started? Book a demo today!

The Business Statistics briefing paper, published in January 2021, reveals there were approximately 6 million small and medium-sized enterprises (businesses with less than 250 employees) operating in the UK in 2020. These figures show that small businesses, which for the purposes of R&D tax credits also includes micro-businesses (less than 10 employees),  accounted for 99% of all businesses in the UK. 

It is not surprising then that small businesses submitted the vast majority of R&D tax credit claims in 2020-21. Data from the Office for National Statistics has the number of SME scheme claims at 76,225, a 16% increase from the previous year. The range of small businesses operating in the UK is vast, and naturally, the effects of tax relief for each individual company varies considerably. But in light of these statistics, it’s worth taking a look at some of the influences the R&D tax incentive has on small businesses. 

The defining characteristics of small businesses

To understand the effects and influence of R&D tax credits on small businesses, we need to be  cognisant of their priorities, pitfalls and how they operate. 

• Less annual revenue: Small businesses often deal in small-scale operations. By definition, the numbers involved in these companies’ projects are smaller. This doesn’t mean they are less likely to be profitable, but it can often mean that their cash flow is monitored more closely. 
• Largely a sole proprietorship or partnership: Small businesses are usually managed by an individual or a few individuals. One significant implication when it comes to tax relief is that the business’s earnings and expenditures can often be found within the owners’ tax returns. 
• Limited reach: In a lot of cases, small businesses operate out of a single location which might even be the owner’s home – a home baking business or local retail store, for example. As a result, small businesses often serve their local surrounding area and do not branch out to other parts of the country.

HMRC is absolute in its definition when it comes to the size of a business, making it easy to determine if your client falls into the small business category. This, naturally, has implications for their R&D tax credit claims, as well as informs which scheme to apply for. All HMRC’s guidelines on R&D tax relief for SMEs can be viewed on this link.  

What is an R&D tax credits?

R&D Tax credits create a reduction in corporation tax a business is liable for. 

The main benefit of the government’s R&D tax incentive scheme comes in the form of corporation tax reduction, however, tax credits are also available for loss-making companies. The SME scheme allows loss-making companies to surrender their losses and in turn, receive a cash credit worth 14.5% of the total loss surrendered. 

Effects of R&D tax credits on small businesses

When it comes to a small business, R&D will often focus predominantly on improving products and creating new ones. Here are some of the positive influences R&D tax credits can have on small businesses:  

• R&D becomes more accessible: R&D work often comes with risk in the form of significant amounts of cash investment. This risk is sometimes amplified for small businesses where access to capital might be limited. R&D tax credits reduce the financial risk associated with R&D projects by ensuring an additional return on investment. If this return comes in a monetary form, the business is free to employ the funds however they see fit. This could be used to reinvest in further R&D, thereby covering some of the initial investment. 
• Source of short-term funding: HMRC aims to pay out R&D tax credits to small and medium-sized companies within 28 days of claim submission. It can then take up to 10 days from when the claim is approved for your client to receive the money. While other factors might affect the repayment time of R&D tax credits, such as peak claiming periods and seasonal variance, it is still a relatively quick turnaround.
• Complementary to other forms of government funding: You can still claim R&D tax credits if you have received other government funding. However, if the funding is classed as ‘notified state aid’, your client will have to claim through the RDEC scheme. This is because SME tax relief counts as notified state aid, and a company cannot receive two different types of notified state aid for a project. 

Related: The basics of the RDEC scheme explained.

Let the R&D experts help!

made.simplr provides an easy and simple software solution for processing R&D tax credit claims for your client’s small business. With it, you can automate your client’s claim, manage the entire process online, and benefit from an intuitive system. Our name says it all – our goal is to simplify the R&D claim process safely and reliably, saving you time and adding value to your clients.

Book a demo today.

As an SME, R&D work is often essential to improving efficiency and growing the business. Receiving a cash payment or a reduction in tax liability due to R&D tax relief is a great way to help offset the cost of R&D projects.

R&D tax relief for SMEs

The SME tax credit scheme is the primary avenue for SMEs looking to claim tax relief on their R&D work. SMEs consistently make up the majority of businesses claiming R&D tax credits in the UK, and the most recent data from the ONS confirms this. During 2020/1, 76,225 of the 85,900 total R&D tax credit claims made were submitted by SMEs. Furthermore, this year saw the amount of relief claimed through the SME scheme increase by 25% on the previous year.

The scheme grants tax relief at a total of 130% of a company’s qualifying R&D costs. As the amount of relief is proportional to the money spent on qualifying R&D work, the scheme rewards companies who invest more in R&D. 

Related: R&D tax credits – the ultimate guide for SME businesses

R&D tax credits do come with complexities, so we have compiled these six insider tips to help equip you to deliver the maximum benefit to your client.

6 top tips for SMEs to make the most out of R&D tax credit relief

1. Understand the size and structure of your client’s business.

According to HMRC, to qualify as an SME, there are a few criteria businesses must meet:

• Employ fewer than 500 people and,
• have a turnover of less than €100m or;
• have a balance sheet worth less than €86m.

The size of your client’s business is important as it will inform which scheme they can claim through, affecting the percentage of tax relief. The ties your client has with other businesses, such as linked companies and partner companies, can also affect their claim.

• A linked enterprise is one that owns more than 50% of another business.
• A partner enterprise is one that owns between 25% and 50% of another business. 

Company structure is a significant consideration as the employees, turnover, and balance sheet will affect the calculation of the size of the applying business for R&D relief. 

2. Be certain of what your client can claim for 

Arguably, the most important aspect of R&D tax credits is identifying your client’s projects that qualify as R&D, as well as the eligible costs. Seeking expert insight into the R&D projects will go a long way in maximising your client’s claim. 

Take the time to read through HMRC’s guidelines of qualifying R&D projects. 

3. Utilise your client’s losses

Loss-making SMEs are able to gain a tax credit through the SME scheme by surrendering their losses. As a result, SMEs can benefit up to 14.5% of the total loss surrendered. This system can provide a valuable short-term cash injection for SMEs experiencing a downturn.

Do note, though, surrendering losses is not always the best decision going forward. If your client expects to become profitable again the following year, surrendering their losses will remove the option of using these losses to offset future Corporation Tax.

4. Make sure your technical narrative is top-notch

The technical narrative is the main written element of an R&D tax credit claim. In it, you need to explain how each project within the claim seeks to overcome technological uncertainty through R&D work. If your client is claiming R&D tax relief for up to three projects they will need to provide full details of each. If they are claiming for four or more, at least three will need to be described in detail (up to a maximum of 10) which together need to cover at least 50% of the qualifying R&D costs within the claim. This is part of HMRC’s R&D tax relief guidance for SME businesses. 

Here are some key tips for writing the technical narrative:

• HMRC isn’t interested in the project’s managerial or logistical challenges – keep the focus on technical issues/advances.
• Refer back to HMRC’s definition of qualifying R&D and make sure you’ve explained clearly how your client’s project meets these criteria. Eg. sought an advance in science or technology, had to overcome scientific or technological uncertainty, and could not easily be worked out by a professional in the field.
• Simple is best – short technical narratives are by and large easier to review by HMRC. For the same reason, avoid using jargon that is specific to your client’s field.
• Include details of unsuccessful projects – these demonstrate R&D work just as much as successful ones.

5. Review the claim before submission!

This almost goes without saying but because it’s so important, we’re saying it anyway! Mistakes or inaccuracies at any stage of completing an R&D tax credit claim have the potential to result in an enquiry by HMRC. An enquiry requires your client to reroute time and resources which could be better utilised. 

Read HMRC’s own guide for making R&D tax credits easier for SMEs.

6. Reduce the likelihood of human error

made.simplr’s R&D tax credit software takes care of many of the complexities of compiling information for an R&D tax credit claim.

Book a demo today.

The Covid-19 pandemic has led to many businesses changing the way they operate. Of all of these changes, remote working has been by far the biggest shift affecting both workers and their managers in equal measure. Indeed, your client may not have been in their usual office for over a year and a half at this point. With few face-to-face meetings, and potentially being off-site for the majority of the project’s duration, you may be unsure of the best way to prepare an R&D tax credit claim. The good news is, with a bit of planning, it can all be done remotely. 

What you need for an R&D tax credit claim

Whether you’re preparing your client’s claim remotely or not, the process of applying for R&D tax credits remains the same. 

• Choose eligible R&D projects and identify qualifying expenditures: 

Talk through all R&D undertaken during the client’s financial year and identify the projects that fit HMRC guidelines to include in their R&D tax credit claim, along with the qualifying costs in each. Accurate record-keeping on the part of your client will make this step very straightforward however HMRC also understands that timesheets may not be used by many SMEs so accurate estimations on time are acceptable. 

There are a few categories of acceptable qualifying costs as defined by HMRC’s CIRD. Read about how HMRC defines qualifying R&D work.

• Prepare a financial report: Creating a financial report involves collating and categorizing all your client’s R&D costs into three main areas: Employee costs, Subcontractor costs, and consumables.

If your client is eligible to use the SME scheme they increase their qualifying expenditure by a further 130%. Read about the other ways R&D tax credits are a helping hand for small businesses.

• Prepare a technical report: This supporting documentation outlines how each of your client’s projects meets HMRC’s definition of R&D. This step goes a long way in ensuring your client’s claim is successful and reduces the growing risk of a query.
• Fill out the CT600L: Completing this form is the final thing to do before sending off your client’s claim. It involves entering your client’s financial values, which were determined in the financial report, into the correct boxes.

How to prepare your client’s R&D tax credit claim remotely

To gather the information needed for an R&D tax credit claim your client may have to involve their technical experts in your communications as they themselves may not have the details of specific R&D activities. These experts should be the people in positions that oversee R&D projects, such as technical supervisors and managers. Some of the communications may involve: 

• Video calling

Due to the global pandemic, face-to-face meetings have become much less common. Platforms like Zoom, Microsoft Teams and Google Meet offer free-to-use options for making video calls. You may want to check beforehand to ensure a stable internet connection as a less reliable one may make the consultation frustrating for both parties. Video calls are especially useful when preparing an R&D tax credit claim remotely as your client can easily consult and include their relevant experts. One of the many features of video conferencing includes the option for screen sharing. 

• Screen sharing

Preparing an R&D tax credit claim involves dealing with numerous figures and occasionally technical drawings or images. There may be questions regarding certain parts of a data set or how a figure was calculated. Screen sharing allows your client instant visibility and collaboration through presentation sharing. With greater interaction through screen sharing both parties can get answers quickly.

The benefits of preparing R&D tax credit claims early

Whether preparing an R&D tax credit claim in person or remotely it is best to get started early. 

The time involved in preparing R&D tax credit claims can put some clients off. However, increased’ demand by businesses for financial relief has put R&D tax credits in the spotlight. It is best practice to start the technical data gathering at the beginning of each financial year and do the financial calculations as soon as your client is close to filing their tax returns.

Recording the details of R&D work as it happens makes preparing a claim much simpler when it comes time to file.

Get help preparing your client’s R&D tax credit claim remotely with made.simplr

Luckily there is an easy to use software platform to help you gather all the supporting documentation as well as calculate your claim and create your financial and technical reports. made.simplr have been helping accountants to prepare hundreds of client’s R&D tax credit claims. The software makes both your and your client’s lives easier by allowing you to:

• Manage claims online – plan your claim through our online platform. Set access parameters so your staff can work on different parts of the claim.
• Integration with Xero – your claims are securely automated. No digging or manual entering to get the data you need.
• Performance analytics – no matter the client or claim, we crunch the numbers to give you the bigger picture.

Find out how to better help your clients remotely by booking a demo today.

While most R&D projects have a start date and an end date, when it comes to preparing an R&D tax credit claim, determining what those are can be challenging. HMRC’s guidelines for what stages of a project qualify for R&D tax credits are narrower than the full duration of the project.

Often, your client’s understanding of their project timeline may be quite different. For them, the project starts with the idea of the product or service and finishes with the end result (either on the shelves or in-service). However, HMRC only considers the research and development stages of the project as part of a claim.

Why is it important to note the difference between HMRC’s definition and your client’s? Firstly, the duration of an R&D project is key to knowing which costs can be included in your client’s claim.

Secondly, you’ll need to determine which accounting period(s) the qualifying R&D project falls under.

Thirdly, including R&D costs in a claim which fall outside of HMRC’s R&D definition could lead to HMRC querying or rejecting your claim.

Related: R&D tax credits explained – What are they? Is your client’s company eligible?

How to figure out your client’s R&D project timeline: the start and the end

R&D work often takes place over many years, with projects incurring varying amounts of expenditure over this time. As a result, qualifying R&D projects can be difficult to track from start to finish when putting together a claim.

‘R&D begins when work to resolve the scientific or technological uncertainty starts, and ends when that uncertainty is resolved or work to resolve it ceases’ – HMRC

What stages can you claim for?

The key stages of any research and development project are planning, market research, product research and development, testing, design, marketing, and rollout. Your client can disregard the marketing and rollout phases, as there is no technological uncertainty in these stages. But the other stages – product research and development and testing, in particular – is where there is most likely to be uncertainty that was resolved through a research and development process.

• The start of R&D: By HMRC’s definition, the R&D work starts when an uncertainty has been identified, usually during the research and development, testing and prototyping stages as mentioned above. This occurs when your client finds that established methods are unable to solve the uncertainty. This most often leads to qualifying R&D work as it creates the need for the project to venture into the realm of new and innovative ideas and work to overcome said uncertainty.
• The end of R&D: the end of a project is when the uncertainty has been resolved or the work to resolve it ceases. Point 34 of the latest guidelines from HMRC explains it in more detail: ‘R&D ends when knowledge is codified in a form usable by a competent professional working in the field, or when a prototype or pilot plant with all the functional characteristics of the final process, material, device, product or service is produced.’

This could be when a new product gets developed, or a working prototype is successfully produced. Or if your client decides not to continue with the project.

It’s important to note that if your client revisits the project at a later stage and makes revisions that try to overcome any scientific or technological uncertainty that may have arisen post-production, they may be able to include this as qualifying R&D. And so, the project starts again.

However, any further expense to refine the appearance of the solution cannot be included in a claim. This is because the aesthetics and design stage of the project does not affect the functionality of the end product, and does not qualify for R&D tax credits.

You and your client should be crystal clear on what uncertainties their projects seek to resolve. It’s important to involve the people that worked to achieve these technological advances. Having a clear understanding of what the technical uncertainties are will help not only in identifying the start and end dates of the project but also in demonstrating how the projects qualify and what costs are eligible within the R&D tax credit claim. Remember, your client will need to keep a strict paper trail of all expenses and working documents.

How far back can my client claim?

The timeframe for R&D tax credit claims is two years from the end of your client’s accounting period. HMRC, therefore, allows R&D tax credit claims to include R&D costs from any projects that fall within this period. The good news is it’s not just completed/resolved projects you can claim for, but also ongoing and even failed projects.

Related: What expenses qualify for R&D tax credits?

Ongoing projects

If a project is ongoing, it can still qualify for R&D tax credits. You do not have to wait for a project to be completed to claim from HMRC. Many R&D projects have yet to reach a conclusion (successful or not) and HMRC has accounted for this. To clarify: if, at the end of your client’s accounting period, the project is still ongoing, any eligible activity can still contribute towards a claim for work completed within that period.

For example, if a company’s accounting year ends 31st March 2022 and they have never made a claim but have been carrying out R&D projects for a number of years, the company would be able to claim for the financial years ending 31st March 2021 and 31st March 2020, before a deadline of 31st of March 2022. If they have spent £50,000 on qualifying R&D activity on ongoing projects for the past two years, their claim would be worth up to £16,500 in cashback or tax savings.

Failed projects

It’s a common misconception that your client’s projects need to be profitable to qualify for R&D tax credits or relief. 

Failed projects can also qualify for R&D tax credits. In fact, a failed project is often a good indicator that there have been challenges and the project has sought to overcome a technological or scientific uncertainty – a key signal to HMRC that R&D work is taking place. The starting point of these projects remains the same, however, the endpoint is identified when the uncertainty fails to be solved by the project. Failed projects often have long development and testing phases. In this instance, it is up to your client to decide when to discontinue work on the project. 

How about claims for loss-making companies?

It’s also worth noting that loss-making companies can also qualify. Often, companies that have yet to make a profit either have ongoing R&D, or haven’t started selling their product yet. Again, this is often a sign that there are continued efforts to resolve uncertainties. 

Claiming R&D tax credits on failed projects or for loss-making companies can benefit your client. The funding made available through an R&D tax claim can provide a cash injection can boost cashflow.

Read more about how to claim R&D tax credit on a failed project in our featured blog.

Automate your client’s claim with made.simplr

With made.simplr’s R&D tax credit software, you will be able to identify the timeline of the projects your client is eligible for. Plus, by using our online platform, you can input, manage and track their R&D claims as they progress.

Let made.simplr do all the heavy lifting for your client’s R&D tax credit claim. 

Book a demo today!

Many businesses investigating R&D tax credits can find it confusing at first. The application process in particular can seem daunting, even though it is in fact relatively straight forward. As long you keep all company records, you will have access to all the information you need when it comes to submitting your claim. It’s just a matter of following the correct process and criteria. Unfortunately, this apparent complexity does mean many businesses ignore R&D tax credit claims for fear of screwing up their claim. However, mistakes are easily avoidable with the right knowledge of R&D and what HMRC requires from companies applying for R&D tax credits.

As with the criteria surrounding R&D tax credits, ‘screwing up’ is an intentionally ambiguous term. This term is used because HMRC themselves intentionally define R&D in a vague way to allow as many businesses as possible to access the benefits of R&D tax credits. Although this ambiguity is recognised, this does lead to some niche cases where executing a claim becomes unclear.

This blog is here to shed light on the simple errors companies make when applying for R&D tax credits. It’s important to know what the possible mistakes are and how they affect a claim ahead of time. This thereby enables you and your client to avoid them altogether and ensure the maximum R&D tax credit benefit.

Common things to avoid before or during an R&D tax credit claim

The following points cover aspects of your client’s business which, if altered, can compromise their R&D tax credit claim. This considers the type of company they are, how they operate and the work they do.

It is advisable to avoid these changes as they can have unforeseen consequences for your client’s R&D tax credit claim. They can limit the amount that’s claimable, alter how to apply, or even make the claim obsolete. Some of these common occurrences result in all three. Continue reading to find out about each example’s context, ramifications and how to avoid it.

• Internal restructuring

The restructuring of your client’s business can affect their claim in a range of ways. However, it almost always happens when the state company’s trade and/or assets are changed. With R&D tax credits, this will mean a claim cannot include any qualifying costs produced after the restructuring. This might seriously limit the amount your client’s claim is worth if they restructure during an R&D project. As such, this mistake can be avoided by completing all outstanding R&D projects before a restructuring. The R&D work undertaken is still claimable at a later date, as per the standard parameters for claiming R&D tax credits.

However, care must be taken when the internal restructuring involves multiple businesses. If a company’s assets and tradables get moved to another company during the restructuring it can disallow them from claiming through the SME scheme. Though this only happens if the original company is ‘wound up’. Winding up, which is also known as ‘compulsory liquidation’, can be done by a third party when they are owed money by a company. The third party can then apply to the court with a ‘winding-up petition’. If successful, it will have the following effects:

• Company assets get sold.
• Legal disputes get settled.
• Funds get paid to all creditors.
• The company collects any money it is owed.

To wind up a company, you must have proof that you are owed at least £750 and that the company in question cannot pay you. This eventuality makes it very important to settle your debts promptly, not only for the purposes of R&D tax credits.

A claim can also get compromised when assets are transferred internally amongst a group of companies. There won’t be a problem so long as both companies are registered in the UK and pay UK Corporation Tax. As a basic requirement of R&D tax credits, this requirement is often overlooked.

There could be a problem if your client’s company outsources most or all of the R&D work to staff employed by another company. When companies incur costs on behalf of one another, the cost-bearing company can recharge the company employing them. As such, if the recharge does not explicitly state that it is for R&D work then it is hard to identify which company is conducting the R&D. Additionally, the recharge may take a while to be sent which may not allow time for the project to be claimed for at all.

• Badly organised outsourcing

As discussed above, outsourcing R&D work can create issues when it comes to claiming R&D tax credits. It is a boon to be able to include the costs of subcontractors and external workers though, so it pays to know how it can screw up a claim.

First of all, it can be difficult to categorise outsourcing between being subcontractors or external workers. Some of your client’s outsourced costs might not fit into either group. Not knowing how to categorise outsourced activities risks the inclusion of costs that aren’t eligible for R&D tax credits.

Furthermore, there are restrictions to subcontracted work within the RDEC scheme. To qualify, the work must be done by an individual, a qualifying body or a group of individuals. If your client includes subcontracted work done by other parties in their claim, it could screw it up.

• Not including all qualifying R&D activities and costs

This is a very common mistake among first-time claimers, who are often unfamiliar with the corner cases of qualifying R&D costs. If your client doesn’t include all their qualifying R&D activities and costs in their claim it won’t reach its full potential. As a result, they’ll be missing out on monetary benefits.

You can find the list of all qualifying costs here.

• Including projects and costs that are ineligible

Businesses sometimes categorise work as R&D when it isn’t. This results in a lot of wasted time in filling out areas of a claim which aren’t relevant. Furthermore, as discussed previously, including ineligible work in a claim can result in rejection and an HMRC investigation.

This takes the previous point a step further as it poses a significant risk to the success of a claim. To avoid this, seek out HMRC’s guidelines for defining R&D and get expert advice.

• Paying Directors large dividends

Often owners pay themselves dividends rather than salaries because it means they are subject to lower levels of income tax. However, dividends are not a qualifying R&D cost as they are not a result of employment. This can drastically reduce the value of a claim if, for example, a major technical director is paid by dividend.

• Lack of record-keeping

Due to the fact that R&D tax credits include work spanning over two years, businesses often forget the work they’ve done. This can lead to valuable projects being missed in a claim. This is also important as records help when it comes to providing supporting information for your client’s projects. Without adequate records to look back on, a business may not be able to explain its R&D processes in enough detail.

Record-keeping is just good business practice to ensure that all qualifying R&D work gets included in your client’s claim.

• Growing beyond the size of an SME

Businesses naturally increase in size as they continue to expand and grow. For R&D tax credits though, being an SME offers a greater benefit than for large companies. As a result, if your client grows beyond SME size then they are effectively losing out when claiming R&D tax credits.

This gets compounded by the fact that the line between SMEs and large companies is very black and white. Once a business exceeds 500 employees, or a turnover of €100m and a balance sheet of €86m, it is classed as a large company with no ifs or buts. Though they then get granted a ‘year of grace’, during which they can still claim as if they were an SME.

• Transitioning from loss-making to profit-making

This might seem strange – why would anyone want to remain in loss? Well, the reason is that companies in loss can surrender their loss to HMRC for a cash credit. For many SMEs, this short-term cash injection is extremely valuable. It may even mean the difference between liquidation and continued trading. At the very least it might facilitate more R&D work. However, if your client expects to be profit-making in the following year, surrendering losses can be detrimental. This affects their accounts because the loss cannot be used to offset corporation tax moving forward.

It is not advisable to deliberately compromise your client’s profit-making ability, but it is worth bearing in mind how it will affect an R&D tax credit claim if they choose to pursue one.

Read more about how to claim R&D tax credits on a failed project.

It should be said that although these examples are detrimental when applying for R&D tax credits, they might be sound business decisions. This is why these examples commonly appear in businesses looking to claim R&D tax credits. If it’s possible to avoid them though, your client is guaranteed to benefit far more from R&D tax credits. As your client’s accountant, however, it’s also important to consider the tradeoff of benefit. For instance, your client may want to delay their restructuring until after they make a successful claim on a busy year of R&D work. Due to this not always being an obvious choice, advice from R&D tax credit experts and specialist software is recommended.

Take extra care with large software claims

A sector that has been growing rapidly with regards to R&D eligibility has been the software industry. More specifically, communication and information, and professional, technical and scientific software. This has manifested in the form of developments like artificial intelligence, cloud computing, augmented reality and more. The difficulty with software R&D is that much of it can be work that does not directly contribute towards the resolution of the project. As such, it’s hard to know what to include in a claim that features software projects.

HMRC outlines what businesses should do when claiming on software projects:

• The scientific and/or technological uncertainties which the project addresses must be clear.
• The technological input for the project needs to be highlighted, as opposed to its commercial output.
• Technological uncertainties get solved by accurately highlighting the challenges faced during the project.

The risks of screwing up a claim

Unsuccessful R&D tax credit claims can result in some dire consequences for the claiming company. Chief among these is an investigation by HMRC. This gets triggered when HMRC identifies or suspects errors or inaccuracies in an R&D tax credit claim. The inquiry then requires the company to produce evidence to validate its claim. If this can’t be done, the company will get hit with a fine. This can be up to 100% of the value of the claim. Given that the business will also have to pay back any benefit already gained, this fine can be devastating to small and medium businesses.

If your client is facing an HMRC inquiry, it is advisable that they act with transparency and professionalism. As long as this occurs, there are unlikely to be any financial consequences. HMRC aren’t trying to catch your client out, they merely aim to discourage fraudulent claims.

Read about the common myths, misconceptions and missed claims of R&D tax credits.

Ensure no mistakes with the help of made.simplr

Doing an R&D tax credit application all on your own takes time. If your client’s claim gets screwed up then this investment of time was a waste. Our R&D tax credit software saves your client valuable time while ensuring accuracy. Your client will get access to many features that will streamline their application process and simplify the collating of information. Among these is integration with Xero, easy-to-use analytics and online management tools.

Book a demo today!

On the surface, it may seem that R&D tax credits only offer companies a financial benefit. In reality, the benefits of R&D tax credits go much deeper and chief among these is cash flow.

One priority that all businesses share is to obtain profitability and cash flow management is the most surefire way to achieve this. Ensuring the money coming into a business is more than the money leaving it is not easy though. This has been especially true recently, with Covid-19 restrictions waxing and waning over the last year and a half. As such, many businesses have sought out less traditional income sources.

R&D tax credits are here to increase businesses’ cash flow by granting additional income.

The importance of obtaining good cash flow through R&D tax credits

As you know, cash flow concerns the movement of money both in and out of your client’s business. As long as your client is receiving more money than they are spending, then their business will be in profit.

While a profitable business is the end-goal for all companies, what we often see when it comes to R&D specifically, is that the profits are predominantly only seen in the long run. This can leave gaps in your client’s cash flow while the project is underway. However, if your client pursues an R&D credits claim they will be executing a cash flow strategy that is hugely beneficial. This is because the financial benefit offered by R&D tax credits can plug the gaps in the short term. Furthermore, R&D work often results in greater efficiency with regards to production processes. This enables positive cash flow in the future by reducing the outgoings of your client’s business.

At the end of the day, cash is what keeps businesses alive. While cash flow is important for all businesses, below are some examples of businesses that are particularly affected by it.

• Startups: Cash flow is most important for startups as the early stages of a business come with a lot of spending. What’s more, is that this financial strain is often due to investments that only yield returns in the long run. As a result, startups aren’t always able to rely on their products, services and customers alone to balance their books. To achieve a positive cash flow, startups must often seek out alternate ways of generating revenue. 
• Seasonal businesses: These businesses’ inflow is not consistent because it relies on products and/or services that are in demand during only small parts of the year. The huge lulls in income seasonal businesses experience often make cash flow an issue. Sources of income not related to the businesses’ main product help these businesses top up their finances. 
• Cash businesses: Businesses such as retailers and restaurants often experience input and output as physical cash. Unless this is well recorded through invoices or other forms of paperwork, it is hard to ascertain the state of the company’s cash flow. Even so, assessing the state of the business’s cash flow can be complicated and time-consuming.

The cash flow benefits of R&D tax credits

Difficulties with cash flow arise mostly as a result of a lack of income sources. R&D tax credits help businesses achieve a positive cash flow in two ways.

1. R&D tax credits as a new source of income

Once you establish the processes and work that qualifies as R&D within your client’s business, they’ll be able to claim year-on-year. R&D tax credits provide either a reduction in corporation tax or a tax credit. Both of these are a significant form of income for businesses of all sizes and sectors.   

Also, R&D tax credits have few barriers to entry beyond the claim application. For example, if your client has received other grants it will not prevent them from claiming R&D tax credits. The only requirement is that the grant did not fund any of the R&D work.

However, your client must be aware of HMRC’s definitions of R&D before they make their claim. Read about the work that qualifies as R&D here.

2. They are visible within your client’s accounts

For SMEs, R&D tax credits are below the line, meaning they are a benefit shown in your client’s income statement. This means they are easily traceable when it comes to calculating cash flow. For companies claiming through the RDEC scheme though, the benefit is visible above the line. This means it is taxable and reflects positively on your client’s gross profit.

Additional info of note

As R&D tax credits are only claimable on projects within your client’s last two accounting periods, they could be waiting months to receive the financial benefit. This is worth taking into account if they require the funds within a short time frame. As their accountant, it may therefore be worth discussing shortening an accounting period. Although this will have other implications for the business, the cash flow benefit may take precedent.

The cash flow benefit offered by R&D tax credits can be secured with the help of advance assurance. This allows companies who are claiming R&D tax credits for the first time to guarantee their claim is successful. However, obtaining advance assurance requires another application that is separate from the claim itself.

How loss-making SMEs can benefit

It might seem counterintuitive for a loss-making company to be undertaking R&D but it can yield great cash flow benefits through R&D tax credits. Loss-making companies are able to surrender their losses in exchange for a cash credit. This credit is worth 14.5% of the total losses surrendered. Unlike traditional R&D tax credit claims, this cash credit is available as soon as the claim is processed. As a result, loss-making SMEs can correct their cash flow at short notice.

Get your client on the right track with made.simplr

With the help of made.simplr’s online R&D tax credit portal software, you can get an accurate prediction of how much your client could be benefiting. Xero integration, seamless transitioning and automation elements mean your client’s claim is in good hands. They will also be able to clearly visualise their cash flow to boot.

Book a demo today!

A mistake companies commonly make when applying for R&D tax credits is overlooking qualifying expenses. Often they tick off the obvious R& D expenses such as consumables and staffing costs, and leave it there. The reality is that the list of qualifying R&D expenses is long and doesn’t only feature obvious costs. Without knowledge of it, your client won’t know the true value of their claim. As a result, they may not want to even pursue R&D tax credits in the first place.

The bottom line is that your client could be missing out on savings by overlooking certain expenses. This blog post is here to make sure that doesn’t happen. Read on to learn about the commonly overlooked expenses your client should be aware of.

The importance of identifying qualifying expenses

The worth of your client’s R&D tax credit claim gets determined by the qualifying projects and expenses. This is because the value of an R&D tax credit claim gets calculated as a percentage of the total qualifying expenses. Therefore, any overlooked expenses will directly reduce the amount your client is saving through their claim.

On the other hand, including all the available R&D expenses in a claim will ensure that it gets maximised. This will guarantee your client gets the most financial benefit possible from their R&D tax credit claim. Identifying your client’s qualifying expenses ahead of time also allows them to plan for the future. As your client’s accountant, having this accurate projection of how much of a saving they will make is very valuable.

Read more about the range of qualifying R&D expenditures here.

Commonly overlooked and missed R&D expenses

Far too often businesses miss out on claiming for expenses that qualify as R&D. These expenses usually come from processes that occur naturally when R&D projects are being undertaken. Some get derived from events in a company’s lifecycle that happen quite regularly. There is a misconception that R&D expenses have to break new ground with revolutionary new products to qualify. Not so. Money spent making improvements to existing processes and products will also qualify as R&D expenses.

• Clothing

Clothes have the potential to qualify as R&D in many ways. A lot of the time innovation involves processes that are dangerous. Operating heavy machinery, for example. As a result, protective clothing gets included as part of necessary health and safety measures. 

Clothes can also qualify as consumables if they get damaged beyond use during the R&D project. However, clothes bought before your client’s two most recent accounting periods cannot get included in a claim.

You can read about the timing parameters of R&D tax credit claims here.

• System migrations

Companies usually migrate their systems to improve their data storage and task allocation. This often involves design changes, improvements and the overcoming of technical uncertainty. As a result, the process of moving the data may incur qualifying R&D costs. Nowadays, system migrations utilise cloud-based technology to boot. Migrations without the use of this modern technology have not typically qualified for R&D tax credits.

One instance where system migration always takes place is during the merger of two companies.

• Efficiency-improving automation

This is often a feature of workflow and manufacturing processes, such as assembly lines. Here automation tools take the form of robotic servo arms, or automated shelving and labeling systems. With regards to robots specifically, there is technical uncertainty in how they will perform and where is best to place them. These factors result in trial and error, the costs of which can get included as qualifying R&D expenses.

It must be noted, however, the material costs of the robot cannot be included. R&D only concerns the testing and design costs.

• Replacements for an obsolete part of a product/process

This is a common occurrence when a certain part of a product is no longer made by an external supplier. If an adequate replacement cannot get sourced, the product business must innovate. This will prompt design changes, material changes and potentially changes to the product’s functionality. 

Furthermore, when the obsolete component becomes outdated, using new technology can be the best course of action. This will involve a lot of testing and maybe the development of prototypes. Both of these things and more can get included in your client’s R&D tax credit claim. If they can provide in-depth evidence of their R&D process, then their qualifying expenses will broaden. There is also potential to include the designers’ wages, as well as those of the engineers.

• Machine learning

The use of machine learning or artificial intelligence (AI) results in processes becoming quicker and more efficient. It also combines well with the other products and processes featured in this list. For example, AI could help educate your client on how best to use their new robotic arm. So although machine learning has become widespread in fields such as manufacturing, it has applications in almost all processes. As such, this is definitely one to consider when making your client’s R&D tax credits claim.

• Cloud computing/networking

There is a bit of a caveat to this one, as it is still in the process of being included as a qualifying cost by HMRC. However, it would be unhelpful not to include this as so many businesses now engage in networking and cloud computing.

Leasing a cloud platform/server results in innovation by granting greater computing power to other businesses. This only applies if the cloud gets accessed outside of the provider’s premises. The provider incurs a cost of housing and running the necessary physical computing power. These cloud services qualify as R&D because they get used to visualise design concepts and beta test software programs.

made.simplr will make sure your client doesn’t miss out

The advice here is for your client to take their time and think outside the box. Businesses don’t always have that luxury though. That’s where made.simplr come in.

Our state-of-the-art R&D tax credit software makes the claims process as easy as possible. In addition, our team of experts guarantee to accurately identify all your client’s qualifying R&D expenses, including expenses you or your client might have overlooked. This will ensure your client’s claim delivers them the maximum benefit possible.

Book a demo today!