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Nine things in your business plan that could impact your R&D tax claim

Jayne Stokes
(Last updated on )
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Although the calendar year is well underway, you may still be finalising the objectives in your 2022 business plan. For many UK businesses, an integral component of their growth involves investing in innovation. If that’s the case for you, there are a number of steps you can take now to make sure you get the maximum benefit from your investment.

This guide will help you plan for R&D in a more effective manner, ensuring there is a ‘golden thread’ running through your business plan. If you want more support with the process, please get in touch to find out how ForrestBrown can support you.

Nine steps in your business planning process that will make sure you get the maximum benefit from an R&D claim

1. Track your R&D projects and spending effectively

You can make an R&D tax credit claim up to two years after the end of your accounting period. However, there are drawbacks to preparing a claim retrospectively:

  1. It delays receiving the funds, which means you can’t factor them into annual budgeting and investment decisions.
  2. It is typically harder to identify R&D and HMRC may ask for extra evidence to support your claim.
  3. It may cause lengthy compliance exercises, like reviewing hundreds of transactions in an expense account.

As well as understanding which projects involve R&D, there are complex rules governing the type of costs that attract relief. Using your existing project and accounting systems to track expenditure will help ensure that your R&D claim is robust when you come to prepare it, and that no eligible expenditure is missed.

The best approach is to think about the information you need for your R&D claim when you are setting up or reviewing your business processes and systems. Simple changes to the way certain transactions are recorded can really help to streamline the process of preparing your R&D claim.

Recording R&D in close to real time (in our experience real-time recording is a bit of a myth) means you can also forecast the funding expected. This can be transformational by recognising the value internally of development work, enabling investment decisions to take into account the type of projects that will receive funding via R&D tax relief.

2. Embed a culture of R&D across your business

If you’re working on R&D projects this year, it’s a good time to share knowledge with team members about the benefits of R&D tax claims and what counts as R&D.

R&D claims often fall solely in the remit of the finance department. Technical staff are needed to support the claim preparation, but often that’s the first (and sometimes the last) they hear of it. Ensuring there is clear visibility across departments of the value of those R&D projects is a win-win: technical staff see that this work is valued and it ensures they retain a good understanding of what counts as R&D.

R&D improves team engagement, particularly for high skilled jobs such as engineers and developers. There are chronic shortages in these roles across a number of sectors in the UK, so staff engagement and retention is particularly important.

3. Understand how contracts impact your R&D claim

Any contract with a customer or supplier which relates to your R&D can potentially affect your eligibility to claim R&D tax relief.

It is unlikely to be possible or desirable to adapt commercial contracts solely for your R&D claim. However, understanding the potential issues and ensuring the paperwork reflects the substance of these arrangements will help to protect the value of your claim.

4.  Consider intra-group transactions

If you have more than one legal entity in a group, the way those entities interact can impact your R&D claims. That might happen when one entity employs your staff, but they work on projects across the group or if you have centralised administration and finance functions, which are charged to different entities.

An R&D claim is made for a single legal entity, so regardless of your group arrangements, you’ll need to consider which entity or entities should be claiming. Arrangements between entities might not be formalised in a contract or service-level agreement, but could impact your R&D claim.

5. Manage your Intellectual property (IP)

R&D generates Intellectual Property (IP) or knowhow for your business. You don’t have to recognise this IP formally, but if you do, make sure you understand how your IP strategy could impact your right to claim R&D tax relief.

There is no longer a legal requirement for IP to vest with the entity that claims R&D tax relief. However, if it vests with another entity, particularly an overseas parent or subsidiary, the arrangements you put in place could impact your eligibility to claim. 

6. Be aware of the impact of grants

R&D tax relief is awarded retrospectively, but grants are normally applied for in advance of a project, which can leave companies with issues when they come to make a claim.

If you are an SME (small or medium sized enterprise) and use a grant to pay for part of the costs of R&D work, your expenditure will be considered to be subsidised. This can result in a lower rate of relief for that expenditure or any expenditure on the same project. If part or all of your R&D claim moves from SME relief to the R&D expenditure credit (RDEC), the rate of relief drops from up to 33% under the SME R&D tax relief to 11%.

Understanding the interaction between whatever grant you are applying for and a future R&D claim enables you to make an informed decision during the grant application process.

It may seem obvious that a grant will be preferable to tax relief, especially as some Innovate UK grants offer funding of up to 75% of a project. However, if the funding level of your project is lower, you could find R&D tax relief more favourable. Innovate UK also offers loans, which means factoring in the timing of each form of funding is important when deciding the right route for your business.

7. Understand the implications of corporate transactions

Mergers and acquisitions are common in high tech, high-growth businesses. Whether it’s your business acquiring a competitor or you are joining a larger group, understanding how this will affect your R&D claim can protect substantial value.

Companies can access SME R&D tax relief if they have fewer than 500 staff, a turnover of under €100m or a balance sheet total under €86m. SME R&D tax relief, as noted above, is significantly more generous than RDEC.

If you grow your business organically and are successful enough to employ 500 or more staff, you become a large company for R&D tax relief purposes. There is a protection built into the tax incentive which applies a ‘year of grace’. However, you don’t get this if you become part of a group that has already passed this threshold and that can lead to some surprises if you are not well informed.

8. Review your accounting policies

It is good practice to review your accounting policies regularly. You might also decide that you need to change your accountant or find yourself within the audit threshold for the first time. All of these situations can affect the way R&D expenditure is disclosed in your management and statutory accounts.

Tax and accounting treatment are two separate concepts, but they are interdependent in many aspects. Many companies don’t realise that decisions they make for accounting purposes can have an effect on the availability of R&D tax relief.

The most common example of this is a decision to capitalise development costs. Capitalised development costs should appear as intangible fixed assets in your accounts and there are provisions in the tax legislation that ensure you can still access R&D tax relief for this expenditure. But there are conditions attached and deciding if you meet these conditions can be complex.

We still see development costs capitalised in accounts as tangible fixed assets or even treated as stock. While there is scope to amend accounts, it is always better to be ahead of potential pitfalls and get it right the first time.

9. Work with an adviser when you start planning R&D activity

It’s much easier to make a robust R&D claim and maximise the amount you’re able to claim if you plan in advance. ForrestBrown offers unmatched technical expertise and works with clients to support their R&D planning through our tax consultancy – please get in touch to discuss your options.