Although a seemingly simple yet attractive option to the non-professional, R&D claims are unsurprisingly complex, with intricacies within the legislation often meaning that mistakes are unwittingly made to otherwise sound claims, especially when the claims are built long-term into the business forecasts.  These are the most common ones we see, often linked to business operations or structural changes. 

Buying or selling companies involved in the claim

SMEs defined within the context of an R&D regime incorporate companies that are connected through common ownership.  If a larger company purchases an SME, or even just takes a significant shareholding, this can mean that the company no longer classes as an SME.  This becomes even more of an issue as, in this instance, the “year of grace” will not apply as the company would be immediately classed as a large company – for the whole year in which the purchase takes place.

An internal restructure

The implications of a restructuring are almost infinite and depend on the circumstances that have individually changed.  For example, transferring a company’s trade and/or assets to another business would usually still allow for and R&D claim to be made up until that point.  However, if that company were wound up, this removes the right to make any claim under the SME regime.  Similarly, caution is advised for costs being internally transferred within a group of companies.  Usually, the costs may be claimed within any of the companies involved if each of their trades are subject to UK Corporation Tax.  However, if there is any ambiguity over what the recharge is for, the it can be difficult to identify the correct company from which to make the claim.

Moving beyond SME status

Once a business no longer classified as being in the SME regime in the context of R&D claims, the proportion of the costs that can be claimed drop by over 66%, from 33p in the pound to just 10p.   In addition to this, the conditions for claims regarding subcontractors become more restricted.  So, although it is usually a positive thing that a business is growing, the impact on research and development claims can be significant.  For the record, the current threshold for moving from SME to large company within the R&D regime is anything over 500 FT headcount, OR 100m Euro turnover and 86m Euro in total assets.  A company is allowed a single year’s grace of being an SME if certain conditions are met however.

Moving from loss-making to profit-making

A company making a loss can see an instant cash benefit of up to 33% of its R&D expenditure, with a tax-paying company seeing a cash benefit of around 25%.

However, in the instance of a company that has seen losses for several years, the R&D claim can extend these losses, while deferring the actual cash benefit until future years.  This needs to be recognised within an SME cashflow, where ready money is often a requirement.

In most instances companies would sacrifice their research and development claim for the long-term or short-term survival/growth of the business.  However, any transition should be considered carefully, especially for businesses that have been loss-making for long periods as the relationship between tax losses and R&D relief is complex.

Large dividends paid to directors

Sensible tax planning for Directors often includes some element of paying dividends, as the tax rates can be lower than typical employment income tax.  However, in the instance where a member of the board’s remuneration could be claimed as part of an R&D cost (e.g. A Technical Director), it may not make sense to pay out large dividends, as these are not classed as a “consequence of employment” within R&D claims, making them not eligible within a claim.

If you require specialist assistance with your claim, please talk to one of our qualified advisors, who can help you navigate the complex issues of research and development claims.