R&D or no R&D?
Most businesses will have heard of Research and Development (R&D) and may have made claims for R&D tax relief in the past. If nothing else, sales associates from R&D companies are keen to make themselves known, especially to manufacturing companies.
However, the R&D scheme does hold more intricacies than may be apparent at first glance. Research and Development is defined as any activity that leads to the innovation of new products, processes, services or improvements to those that already exist. The slight difficulty here is that this advancement cannot just be within your own company.
Your project must:
– look for an advance in the field your business is trading in
– overcome scientific or technological uncertainty
– have tried to overcome the scientific or technological uncertainty
– not be easily worked out by a professional in the field
In essence, you must make advances in your field, developing a new process or improving on an existing one. HMRC do agree that a project can be an advancement if there was already development by another company, but it was not publicly known or available. However, they also say that an expert on the subject would need to look at your situation and be unable to say whether your project is technologically possible or how it can be done, even after referring to all the available evidence.
This means that despite the sales associates’ enthusiasm, unless you have applied significant time and resource to enhancing your products and services to achieve something your competitors cannot, it is likely you have not incurred true R&D expenditure.
In a complete contradiction though, at Sowerby we see numerous firms that are so immersed in their technological advancements and what they consider their standard processes, that they do not realise that what they consider the norm of advancing their business is actually relevant R&D expenditure.
I think I have R&D spend, what do I do?
If you have R&D expenditure you can gain tax relief by submitting a claim. R&D claims can be very complex to calculate and Sowerby would always suggest having an expert help you understand what costs can be claimed. They will visit your site, discuss items with you, review processes and ask for information to help build your claim. There are detailed rules about types and timings of costs that are allowed, and calculations of level of tax relief, that are beyond the scope of this article, but if you would like to know more please contact your Relationship Partner.
Once all true R&D costs are collated the historic process (in a very simplified explanation) was to add the R&D claim to your tax return and best practice was also to affix your R&D report from your expert showing how the figures had been calculated. HMRC have recently introduced changes to the claim process in order to tackle errors and suspected abuse of the R&D tax relief regime.
The changes
From August 2023 an Additional Information form will be required for every R&D claim made on a tax return. These include breakdowns of costs, and detailed information on the R&D project. HMRC recommend that R&D reports provided by advisors are still included as well. Claims without Additional Information forms will likely be rejected.
For periods starting after 1 April 2023 companies are required to inform HMRC of their intention to file a claim at any time from the start of the accounting period to six months after the end of the accounting period to which the claim relates. The aim of this rule is to prevent last minute ‘speculative’ claims made after the relevant accounting year.
HMRC have confirmed that if the ‘Advance Notification Form’ is needed but not completed that this renders the R&D claim invalid and, if shown in the corporate tax return, it will be removed by HMRC as an “error”.
When making an Advance Notification, a company must submit “a summary of the high-level planned activities, for example if you’ve developed software what it will be used for to show that the project meets the standard definition of R&D”. There are some caveats for Advanced Notification, for instance for multiple projects or for on-going projects but best practice is to start from the assumption that notification will be required.
What does this mean for me?
In a time of rapidly changing technology, the changes and complexities of the R&D regime should not dissuade you from considering the possibility that tax relief may be available on costs incurred. Rather, R&D should become something that is built into your forecasts and planning procedures. Large projects that are likely to produce R&D costs are likely to be planned in advance. The concept of R&D should become an additional part of this planning procedure.
If you are unsure as to whether your business has valid R&D spend or may incur it in the future please contact Sowerby where our team are well versed in guiding you through the R&D process and can explain the next steps for a successful Research and Development tax relief claim. You can contact us on 01482 888 820.
Published by Sowerby Chartered Accountants, January 2024