Since the virtual doors opened at Radish, I’ve worked with loads of businesses from all kinds of industries; some have never made a claim, others have used a specialist (but the process was incredibly time consuming) and those where we work together with their accountant.
The partnership with accountants is great. The accountant already has the insight and understanding of the business, to identify an opportunity to claim and we have the experience to ensure that the claim is maximised to it’s fullest….without overstepping the boundaries. Nobody wants an HMRC enquiry.
But I’ve also witnessed a few horror stories. If you’re not using a specialist in R&D, there’s a big risk you could be underclaiming…..or even worse overclaiming. My advice? If you’re accountant handles your R&D tax claim on your behalf, check out these questions with them.
HAVING THE RIGHT EXPERTISE
Accountants aren’t always tax experts. It’s worth finding out if your accountant is also a chartered tax adviser and most importantly whether they specialise in R&D to ensure your claim incorporates everything that qualifies.
ASK YOURSELF: Do I know if my accountant is a chartered tax adviser, specialising in R&D Tax?
ASK YOUR ACCOUNTANT: Do you work with an R&D specialist to prepare our claim?
KNOWING WHAT CONSITUTES AS R&D
Tying very closely to having the necessary expertise, knowing what constitutes as R&D is where I see mistakes time and time again. And it’s hardly surprising; tax is forever changing minefield. Unless you have your head in it every day, I really don’t understand how you can be aware of all the many nuances this relief holds.
I could really go to town, but I won’t, here’s just a few examples of things that I often see missed:
1) Claiming expenses
As an example, if you fly to the Far East to see a supplier any expenses related to that travel can be claimed back if they are paid for on a personal accountant…. the hotel, the food. However, if this is paid on a company credit card you can’t claim R&D. Amazing, right?
We took on a client who had spent £15k on travel to meet sub-contractors; paid for on a company card – if the travel has been paid on a personal card, they would have been able to claim nearly £4k back.
2) Acting as a subcontractor
If you are acting as a subcontractor, you might still be able to claim R&D. So, if you’re delivering part of an R&D project for a large company, you can still claim R&D as if you are a large company under the RDEC scheme. There, are so many variables at play here, so it’s critical to have your head in this – just knowing whether you are in the category of subcontractor, or large company!
A large company was building a web application in-house and subcontracted part of the build to a third party. This third party could have claimed an extra £5K from under the RDEC scheme.
3) Doing work for a customer
If you are delivering work for a customer, you might be able to claim R&D for the internal R&D you are doing. For example, if you are acting as a contractor for anyone, you may still be able to claim R&D for the time and costs your team spend increasing your own expertise.
We took on a Digital agency who were delivering a lot of R&D work for third parties; they assumed that because the work was for another company it didn’t qualify – we were able to identify two areas giving them a tax saving of £40K.
4) Salary vs. Dividends
As a business owner, if you are personally delivering a lot of technical work, you can claim R&D relief on your salary. However, you need to do the analysis to determine whether it is more beneficial to take a salary or dividends.
A Director we worked with was taking a small salary of £10K but dividends of £200K. However, 80% of their time spent was on R&D.
We worked with him to ensure that the net he was taking from the company stayed at £148K, whilst the company made an additional saving of £17K.
Now this one I see time and time again. You cannot include rent in your R&D claim. However, if you are renting a property with bundled power and utilities, HMRC accept claims of 10% of the total rent. Worth knowing!
A pharmaceuticals company we worked with paid £30k/year for a utility and rent package; looking back over 2 years we secured them an additional £2K.
6) Supporting Staff
If you employ staff who have a role in supporting those working directly on R&D for your business, a percentage of their time can be included; otherwise known as, ‘qualifying indirect R&D activities’.
A company had 30 employees, of which 3 employees had supporting roles – salaries totalling £80K – they should have been claiming an additional £20K. That’s significant money back into the business.
ASK YOURSELF: Has my accountant shared specific tips about changes I could make to maximise my R&D tax relief?
ASK YOUR ACCOUNTANT: Are there any ways I could maximise my R&D claim further?
KNOWING THE BOUNDARIES
Unless you specialise in R&D it isn’t always easy knowing exactly where to set the boundaries around an R&D claim; knowing when it starts and where it ends.
Where R&D starts
A common misconception is to exclude the time spent on the planning and design stage of a project, focusing purely on obvious costs like subcontractors. It’s critical to establish a system to record this stage – I’ve seen many cases where the ‘pre-work’ has been missed, resulting in under maximised claims.
A client building a prototype for a heating system, had two employees (paid £100K in total) completing preparatory work for a month – through this, we identified an extra £2.5K on top of the claim. Every little counts.
Where R&D ends
On the flip side, I’ve also witnessed costs being included in claims outside of the project scope, including aspects that don’t contribute towards the overcoming a challenge e.g. making finishing touches to a product or marketing.
We saw a client had been claiming for A LOT of marketing & routine design costs – error – which meant they had been overclaiming by approximately £5K!
ASK YOURSELF: Do I have a foundation understanding of the scope of our R&D claim?
ASK YOUR ACCOUNTANT: Can you give me an outline of what is included in our R&D claim?
The two most common approaches I have seen to repeat claims is (1) you are sent a complicated spreadsheet to complete, or (2) your accountant handles the repeat claim on your behalf.
There are problems here, (1) requiring a lot of your time and (2) leading to a risk of overclaiming (and an HMRC enquiry), or underclaiming. There will be changes. No two claims are the same year after year and you will need to provide new information. To be honest, I like to approach every new claim, like the first claim, which my clients appreciate as it only takes 1 hour of their time.
We had a case where an accountant had used a copy & paste fashion, with very little detail, as a result the additional cost claimed was around £50K! This put the client in unnecessary risk for an HMRC enquiry.
ASK YOURSELF: Does my accountant take time to speak to me about changes to my R&D claim?
ASK YOUR ACCOUNTANT: What do you need from me, to make our R&D claim next year?
HMRC CHANGES & STRATEGY
Changes to R&D Tax Relief are imminent in April 2020. Unless your accountant has their finger on the pulse of tax, this might not be something they are aware of. In a similar vein, HMRC deploy strategies throughout the year, focusing heavily on different aspects of the relief.
As a specialist, you need to be aware of what HMRC is doing to time your claim efficiently – the cash flow benefit could be significantly impacted by a huge delay, especially around March when the majority of claims are made.
For example, if you put a claim in to HMRC in Feb, you’d get it back in 5 weeks; put the claim in later….say April, you might see you money for up to 5 months – that’s significant for cash flow.
ASK YOURSELF: Have I been notified about the proposed changes coming in April 2020?
ASK YOUR ACCOUNTANT: What are the proposed changes to R&D relief due to come in this April & how will they affect our claim?
MAXIMISING THE CLAIM
There is more than one option you can opt to receive the benefit for your R&D claim. Without the experience, it isn’t always obvious which route it best to take – in some cases your Accountant might not even be aware there are different options that should be considered for your business.
For example, in some circumstances, it can be more beneficial to the business to carry back the loss, instead of claiming the tax credit.
ASK YOURSELF: Has more the one option been suggested to me, for the benefit of my R&D claim?
ASK YOUR ACCOUNTANT: What are the different options for receiving my R&D claim benefit?
Ultimately, you want to make sure you are fully maximising this generous tax relief, as well as not overclaiming – stuff changes all the time, so it’s fair to ask your accountant these questions.