R & D tax relief - How best to make a claim

Mike Chapman is Director of Corporate Taxation having joined the firm in January 2015. He takes the lead on all corporate tax consultancy matters within the firm having previously been with a number of national mid-tier and big four practices. Mike is an experienced speaker on technical issues and a regular contributor to local business publications. Here Mike talks about the opportunities with Research and Development tax relief and how best to make a claim;

Mike Chapman, Corporate Tax Director

The benefits to be obtained in making a successful Research &Development (R&D) tax claim were evident from the introduction of the regime, initially just for SME companies, in 2000. Since then the scope and benefits of making a claim have increased and are part of the Government’s drive for the UK to become an innovation economy.

At its heart there are two aspects to formulating a successful claim:

• Determining whether the company is undertaking a qualifying R&D project
• Identifying and quantifying the costs involved.

Qualifying expenditure

In respect of the latter, the checklist to follow to qualify expenditure must be:

• revenue and not capital in nature,
• related to a trade that the company carries on,
• allowable as a deduction in computation of the taxable profit,
• related to an activity that directly contributes to seeking an advance in science or technology,
• or a qualifying indirect activity,

But remember the expenditure can only be incurred on:

• staff costs
• software
• consumable materials
• subcontracted R&D costs (with restrictions for non SMEs)
• or externally provided workers

Qualifying project

This is the more qualitative part of the claim requiring judgement on the part of the practitioner. For a project to qualify, it must seek to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty.

The claimant company should ask various questions to satisfy itself that a project qualifies. These should be the same questions that HMRC would ask in the event of an enquiry, such as;

• What is the R&D project and, if relevant, what is the larger commercial project?
• What are the scientific or technological uncertainties involved in the project?
• How are those uncertainties being overcome?
• What methods are being used to overcome the uncertainties?
• Are the methods of overcoming the problems themselves scientific or technological advances and if so what are those advances?
• In what ways does the project go beyond the current state of knowledge?
• Why is the project or capability not readily deducible by a competent professional in the field?
• When were the particular uncertainties overcome?