7 ways to maximise your R&D tax credit claim
The SME Research & Development Tax Relief scheme supports companies that work on innovative projects in science and technology. The average R&D claim is currently more than £80,000, and is usually taken as a BACS payment, paid directly into the company’s bank account.
It is an important relief which all SMEs that solve technical problems should consider. So, if you carry out one-off projects, do bespoke work for clients, engage in trial-and-error developments, then you may well be eligible for R&D tax credits.
So, let’s move on to how you can maximise your R&D tax credit claim…
1. Don't miss your deadline
This is the big one.
If you were to make a claim now, you could claim for all the activity done in the two years up to your last year end date.
As an example, let’s say your year-end is 31 March 2021. If you file your R&D tax return before 31 March 2021, you can include all of the development work done in the two years from 1 April 2018 to 31 March 2020. If, however, you file after 31 March 2021, then all of the work done from April 2018 to March 2019, is lost – you can’t claim for it.
2. Keep good records
An online bookkeeping system is a good solution. In most online accounting systems, there is an option for departmental analysis. Which means you can set up a department called ‘R&D costs’, and, as you enter your purchase invoices into the system throughout the year, you can assign your R&D invoices to that department code.
This will help you reduce the risk of missing something that could be used towards your claim. You will also be able to run an expense report to see your total costs on R&D at any point in the year.
3. Consider the effect of grants before you apply
Many grants are classified as state aid. You cannot claim SME R&D tax credits on projects that are also state aid (you may still be able to claim under the RDEC scheme, which is much less beneficial, and not discussed here).
So, before applying for a grant, look at the value of the grant, and the total costs involved. It may be that the SME R&D tax credits scheme is more beneficial to you than receiving the Grant.
4. Pay directors salary rather than dividends
Many directors of SME businesses take a small PAYE salary, and boost their earnings with dividends. This is often the most tax efficient way for the directors to extract profits from the business. But dividends can’t be included in an R&D Tax Credit claim.
So, where a director contributes significantly to R&D, it may be worth considering putting a higher salary through for the director, to potentially claim more in R&D tax credits.
This would of course need considerable review to determine the benefit, because every director’s personal tax situation is unique.
5. Subcontractors vs Employees
Subcontractor costs are allowable for an R&D tax claim but are restricted to 65% of their total costs.
Consider bringing your subcontractor onto your payroll. This would allow you to claim 100% of that person’s R&D costs, and you would then get the 130% R&D uplift too -i.e. a total of 230% of their costs!!
Again, this needs careful consideration. It only really becomes an option if you have confidence that you will have enough work for the subcontractor(s) throughout the year.
6. Traval Costs
One of the strange rules for R&D tax credits is on travel costs.
Travel costs are NOT allowed if they are paid from the company’s business bank. They ARE allowed if the member of staff pays the costs themselves and claims the costs back from the company later.
So, where your employees have to incur travel specifically for R&D projects, see if it is an option for them to pay for it themselves, and reclaim it on a monthly expense form so that you can use the costs in your R&D claim.
7. Create an innovation culture in the business
You should do this, anyway. This is an entirely separate discussion, but simple things you can do to nurture an innovation culture are : -
Actively look for problems and conflicts to solve
Work closely with “lead customers” on new ideas, and on pushing your products beyond their limits
Give staff time for creativity
Provide flexible working
Encourage ideas, and act on them
Share the company’s values and goals
Recognise and reward innovative ideas throughout the business
For more information, contact www.quantumtax.co.uk.