Following yesterday’s budget announcement, the National Insurance contribution cut from 12% to 10% seems to have claimed the spotlight amongst a plethora of other measures.

In this article, we will look specifically at the impacts that the last 12 months (including yesterday’s announcement) of legislative changes have had and will have moving forward for innovative UK businesses claiming R&D Tax Reliefs.

Bureaucracy, compliance, and reduction seemed to be the themes of the most recent legislation development, with April 1st, 2023 marking a turning point in the world of R&D Tax. We’ll start with bureaucracy; From the 8th of August 2023, companies must complete an additional information form to HMRC to support all their claims, alongside the financial assessment and detailed technical narrative. As a result, we may see self-claiming businesses having to invest in more time and resources whilst also opening themselves up for unintentional error – those of you who may have already gone through the submission of the AIF online will have noticed that the UI/UX element arguably requires a bit more ‘polishing up’.

The administrative burden for claiming R&D Tax Relief doesn’t stop here, though, as can be seen for first-time claimants or those who haven’t claimed in the last three financial years. Such companies will now be required to complete a notification form 6 months after the end of the period of accounts. Intended by HMRC to pre-emptively strike down ‘faulty claims’ and streamline the claim processing process, if a notification form wasn’t submitted on time, the change will result in companies foregoing the ability to claim retrospectively despite the statutory deadline to amend your Corporation Tax return still remaining at 24 months. Many Directors of SME’s I’ve been speaking to will often wear more than just the one hat, meaning until the time comes to prepare their company accounts (often just before the 9th month after their financial year has ended) throughout the year, R&D Tax Credits will be about 57th on their priority list. This may quite likely result in companies who are early on in their journey failing to submit the notification form in time, hence missing out on this incentive.

After sifting through the administrative changes, let’s now get stuck into the numbers. On top of the above aspects of the legislation shake-up, the changes to the R&D Tax benefit will impact both SME’s and Large businesses alike, albeit some more positively than others. For example, from April 2023, SMEs have had their deduction rate reduced from 130% to 86%, along with their rate of surrenderable tax credit reduced from 14.5% to 10%. This effectively means that loss-making or low-profit SMEs will see a ca. 40% reduction in payable tax credits (i.e. cash into their business). Innovative SMEs and start-ups, heavily rely on R&D credits for cash flow and other funding purposes, so this change will naturally adversely impact their expenditure, business decisions and forecasting. On a positive note, any grant expenditure claimed back through R&D Tax Relief will have increased. Grant expenditure falls under the RDEC (Large company) scheme, which increased as a benefit from 13% to 20% as of April 1st, 2023. Businesses may leverage this, though Grant applications are typically arduous and resource-heavy, yielding a low success rate. For example, innovative UK grants have a notoriously low success rate, due to their commercial and competitive nature, further adding to the cost/benefit complexity businesses face in the coming years.

In another twist, following yesterday’s Budget, for accounting periods starting 1 April 2024 onwards, HMRC will merge the two schemes to reduce administrative burdens and confusion regarding which scheme companies should claim under. Based on the initial outline of the proposed changes, the merger seems welcoming, however, this will mean a profound change for SME’s as it will be based on the RDEC scheme as an above-the-line tax credit.

In the meanwhile, before the merged scheme is fully in effect from 2025 onwards, the recently added complexities are likely to result in delays on HMRC’s processing side in the short term, despite the long-term goal being to streamline claim processing. In the last two years, claims have taken anywhere between 1-3 months after submission to be paid out. This has been affecting businesses’ cash flow, particularly for smaller businesses or startups relying on timely credits to fund ongoing R&D. For our clients, Walmer aims to provide a solution for that problem as we are rolling out an R&D lending product, where you can receive your benefit in advance of the claim being submitted.

The sheer amount of changes and complications is quite mind-boggling for the non-expert and has culminated in many accounting firms closing their R&D Tax services, particularly to SMEs. Why? The risk/reward no longer benefits them and many accountancy firms do not have the in-house technical expertise and manpower to prepare R&D claims which maximise return and are 100% compliant. The risk of an increasingly possible HMRC enquiry (and defending said enquiry) is often too great and deemed unmanageable. HMRC’s randomised mass approach to enquiry checks earlier this year has become too unpredictable for some accounting firms who do not have a specialist R&D Tax department, to prepare for and efficiently deal with, leaving their resources stretched thin and reputation at risk.

To conclude, while some of these changes aim to streamline and modernise the R&D Tax Relief process, businesses will need to adapt to potentially higher administrative burdens and uncertainty in the short to medium term. These changes are exactly why Walmer Group exists – we aim to guide and navigate innovative businesses through these turbulent times.

From technical expertise to financial tax compliance, Walmer Group covers all grounds of R&D Tax Relief, allowing businesses to divert their attention to other aspects of running their companies.

It’s a little bit easier for us, as we live and breathe R&D Tax, day in-day out 😊.

One of the most rewarding parts of our job at Walmer Group is helping innovative organisations in navigating the ‘minefield’ that is public (government), and private funding.

For those that are new to the scheme, the R&D Tax incentive rewards companies for undertaking research and development activities, by incurring challenges when making advancements in their field. The financial benefit of taking advantage of R&D Tax Relief is being able to offset a company’s Corporation Tax or receive cash credit injection into the business, with the ability to claim two accounting periods retrospectively.

For those that have some knowledge, or are experienced in claiming the incentive, this article may be of interest to you as it discusses the 9 biggest mistakes that Walmer Group sees companies making when claiming R&D Tax Relief. This is not designed to criticise the work of your company or those that have advised you previously but to simply assist you with future claims.

1. COVID Government Support can impact your R&D Tax Relief claims 

With the Government releasing support for UK companies during the pandemic, various funds and loan schemes were introduced to help companies navigate tough times. These included the CBILS (Coronavirus Business Interruption Loan Scheme), Bounce Back Loan, and Furlough. One of the common issues that we have seen with companies seeking R&D Tax Relief, is misunderstanding the effect that these have on their claim.

2. “I am not paying Corporation Tax, therefore I cannot claim R&D Tax” 

This is a common misconception we often hear from companies! Regardless of your business being profitable or not (i.e subject to paying Corporation Tax), does not mean that you cannot utilise the R&D Tax Incentive. The scheme can often be more beneficial for loss-making companies, as you can surrender any losses generated in the period of claiming R&D Tax Relief for a cash credit.

3. Not including Qualifying Indirect Activities in your claim  

There are additional costs that companies are often eligible to claim, and can include members of staff, such as support staff, that help facilitate the R&D work. These activities can be found for different industries in the government’s HMRC manuals and can have a significant impact on the amount you receive back as part of your previous, or upcoming claim(s).

4. Not considering any linked or partner enterprises  

When looking to claim R&D Tax Relief, you need to consider your wider shareholdings and company group structure. If you own, part-own or the claimant company has any parent or subsidiary companies, you may need to include all or apportionment of the following:

• staff count
• turnover
• balance sheet total

The combined total figures should then be considered when determining whether you can claim under the SME scheme (where you can claim up to 33% of your expenditure), or have to submit your claim under the RDEC scheme (where you can claim up to 10.5% of your expenditure).

5. Have you been subcontracted with R&D work? Is it your Intellectual Property?  

If R&D work has been subcontracted to you, you need to consider and review the legal agreements between both parties. R&D Tax allocation depends on where the intellectual property resides and the fees associated with the work, which could result in being ineligible to include in the claim.

6. Report Structure & Technical/Scientific Narrative:  

As the technical/scientific report, submitted with an R&D claim, aims to provide an overview of how projects are undertaken by a company qualifying for tax relief, it is important to be clear and concise about the advancements and uncertainties faced. We often find that companies focus too much on the commercial merits of a product/solution, rather than the underlying technological advancement made to achieve those merits.

On the other hand, some companies elaborate on their projects in a very technical nature and use sector-specific jargon that can confuse an individual reviewing a claim if they are not fully briefed on the science or technology. The report should clearly outline what the baseline technology (“state-of-the-art”) at the time was and elaborate on the inherent limitations or uncertainties/challenges it presents. As the report will also include a financial assessment, it is important to explain the methodology used to derive the qualifying expenditure and have clear breakdowns of the costs included in a claim.

7. You can claim capitalised expenditure (Intangible Fixed Assets)  

Many companies can opt to capitalise expenditure, so it becomes an asset on your balance sheet. This expenditure is typically classed as ‘revenue’ (therefore entered through your Profit and Loss). However, if a company feels the cost/time spent is facilitating something valuable to the business (e.g., employee time, subcontractor invoices, etc spent on developing a product), you can capitalise as an Intangible Fixed Asset and claim R&D Tax Relief.

8. Claiming R&D Tax Relief on Grant-funded projects – Is it Notified State aid? What does that mean?  

If you receive a grant that is notified of State aid, this creates complexity when claiming R&D Tax Relief. Under EU funding rules, a company is unable to claim another type of Notified State aid on the same project; When claiming under the SME R&D Tax Incentive, it is classed as Notified State aid. Therefore, any expenditure utilised with the Notified State aid funding, would be ineligible to claim under the SME scheme. For this reason, you would need to claim under the RDEC scheme.

9. Companies that offer VAT-exempt services (e.g. insurance, finance & credit, education & training, fundraising events by charities) and looking to claim R&D Tax Relief can claim any invoices paid inclusive of VAT  

UK companies may be eligible to claim part of their R&D spending under HMRC’s R&D Tax Credit Incentive. These companies may be able to claim up to 33% of qualifying expenditure under this scheme. Specialist R&D Tax Consultants exist to provide guidance and assistance to these companies who may be new to the scheme or may not be optimising the amount that they may be entitled to claim back. These companies will either charge a company a fixed fee to do the consulting work for a business or charge a success fee on the money that is returned, once the claim has been approved by the Government.

We, Walmer Group, are an R&D specialist consultancy that exists to help businesses in maximising their claim from HMRC and we work purely off a success fee from funds that have been approved and returned under the scheme. Many advantages exist for Founders and Entrepreneurs under this model, but the main one is that it frees up resources and time that can otherwise, be spent in scaling and raising additional finance for their business growth.

If you would like a complimentary consultation on what your company might be eligible for, email our Commercial Director, James Campbell, at:  jcampbell@walmergroup.com