R&D capitalisation

Summary of R&D rates for profitable and non-profitable companies _NB: These are changing from the below effective 1 April 2023

R&D Tax Credit

Disclaimer: The following information pertains to the UK and outlines general principles regarding R&D tax credits. Legislation surrounding tax credits can change regularly. This content does not constitute advice on managing tax credits. Instead, it focuses on the necessary steps in accurately capturing information, especially concerning time tracking.

Research and Development (R&D) Tax credits offer a beneficial incentive for businesses engaged in innovative projects, allowing them to claim a proportion of their R&D costs as tax relief. R&D tax credits serve as a vital lifeline for small and medium-sized B2B software businesses, offering substantial support and encouragement for their innovative pursuits. These credits provide a valuable financial incentive by allowing companies to claim a proportion of their R&D expenses as tax relief. By offsetting a portion of your R&D costs, you can channel more resources into exploring new technologies, enhancing existing software solutions, and fostering a culture of innovation within your organisation.

To successfully claim these credits, attention to detail, proper documentation, and adherence to specific guidelines are essential. Here's a breakdown of key aspects to consider and the steps involved in the R&D tax credit process.

Process

Achieving a successful R&D tax credit claim requires a systematic approach$^1$ which is as follows:

1. Identify eligible R&D activities: Determine which of your company's activities qualify for R&D tax credits. Focus on activities that involve innovation, improvement, and solving technical challenges.
2. Track time and expenses: Maintain meticulous records of all R&D-related time spent by employees and contractor fees. This will be crucial for calculating the tax credit.
• Compensation information
• Collate for the relevant period employee salaries by a) Gross Pay, b) Employers NI and c) Employers Pension. Do not include any other employee benefits
• Contractors
• Collate all third party contracts who did development work for the relevant period
3. Calculate the tax credit: Use the collected data to calculate the R&D tax credit amount. Consider seeking professional assistance from tax consultants if needed.
4. Prepare documentation: Gather all supporting documentation, such as time sheets, project records, and financial statements. This will form the basis of your R&D tax credit claim.
5. Submit the claim: Submit the completed R&D tax credit claim to the relevant tax authority, ensuring compliance with submission guidelines. Monitor the progress of your claim and follow up promptly with any inquiries or requests for additional information..
6. Follow up: Keep track of the status of the claim and follow up with the tax authority as needed.

Documents and information required for the R&D tax credit claim:

1. Time allocations by R&D project by engineer
2. % of salary costs covered by R&D
3. % of projects covered in the Technical Advancement and Technical Uncertainty section
4. % of total salary costs taken as R&D purposes
5. Technical Advancement and Technical Uncertainty section for each project
6. Detailed records of time and expenses incurred during R&D activities
7. Documentation to support the R&D tax credit claim, including time sheets, project records, and financial statements.

Key considerations for credit reports

A well-structured and comprehensive R&D tax credit report is crucial for a successful claim. Here are some key considerations$^1$$^2$:

• Detailed time allocations and project coverage: Clearly document the time spent on each R&D project by each engineer. This demonstrates the extent of your company's involvement in these projects.
• Technical advancement and uncertainty sections: Specify the percentage of projects covered under these sections, indicating the level of innovation and uncertainty involved. This highlights the complexity of your R&D activities.
• Salary cost allocation: Ensure that the percentage of salary costs allocated for R&D purposes remains below 80%. This demonstrates that your company is not over-claiming for R&D-related expenses.
• Team member allocations: Assign percentages to team members involved in R&D activities, distinguishing between roles like product owners, developers, and support staff. This provides clarity on the specific contributions of each team member i.e. do the % allocation to each team member make sense? Product owners or technical founders 10-20%; implementation team < 20%; developers < 80%. All others including support = typically closer to 0%.
• Comprehensive project details: Provide in-depth explanations under the Technical Advancement and Uncertainty sections for each project. This demonstrates your understanding of the project's challenges and the innovative solutions you have implemented i.e. is there a Technical Advancement and Technical Uncertainty section for each project that is being discussed (note: we ideally need 70% coverage of all the projects that are considered to be R&D. We don't need to discuss every single project).
• Document formatting and consistency: Ensure the report is easy to read with clear headings, consistent fonts, and accurate formatting. This enhances the report's professionalism and clarity.

R&D tax credit supporting analysis

A robust backup analysis is essential to support your R&D tax credit claim. Here are some key points:

1. Financial data alignment: Verify that the gross salary data in your R&D tax credit report aligns with the numbers in your audited financial statements. This ensures consistency and accuracy.
2. Backup documentation: Maintain backups for all R&D-related expenses, including salaries, contractor fees, utilities, and software costs. These backups can be essential in case of audits or inquiries.
3. Integration with P&L: Confirm that the R&D-related costs reflected in your R&D tax credit report align with the audited Profit and Loss (P&L) statement. This demonstrates the accuracy of your reporting.
4. Contractor time calculation: Multiply contractor times by 65% as per the prescribed guidelines$^2$. This ensures that you are claiming the correct amount for contractor contributions to your R&D activities.

Seek assistance from experts

To ensure a successful claim, consider seeking guidance from experts in the field. Tax consultants or specialists can provide invaluable assistance in identifying eligible R&D activities, tracking time and expenses accurately, calculating the tax credit, preparing comprehensive documentation, and submitting the claim compliantly. They can also help interpret technical guidelines and ensure that your claim aligns with the HMRC and other regulatory requirements. Engaging legal counsel can further strengthen your position in case of audits or inquiries. Their expertise in tax law and R&D tax credit regulations can provide peace of mind and minimise potential risks.