Having visited numerous companies over the recent months to discuss their R&D claims (or the potential to make one), it comes as no surprise that many companies are already aware of the R&D Tax incentives scheme and are making claims. Whilst some companies felt that they had already explored all areas of their business for R&D eligible activities, others had not fully grasped the breadth of the Tax definition of R&D and were limiting their claims, often to a handful of people within their ‘Development’ or ‘R&D’ teams. In another instance, whilst the company had claimed for eligible activities undertaken for software development, it had missed out on other areas of their business such as the work undertaken by the teams within their manufacturing department.
So why are companies not fully capturing their R&D eligible activities?
There seems to be a common misconception by companies that R&D eligibility is restricted to the development of a new product, process or service. However, it is not often that a company will be involved in developing something entirely new, due to high initial investment costs. Most businesses will be instead be continuously developing, often significantly enhancing their existing products/processes/techniques in order to remain at the forefront of competition. Factors such as the push for delivering projects at lower cost, higher speeds, at increased efficiencies, within strict regulatory requirements, etc. often drive many businesses to innovate, yet many are missing out on claiming for these activities deeming them as part of their normal day-to-day activities.
A further challenge faced by companies is identifying the boundaries of a R&D project within an overall commercial project. R&D eligible projects could potentially include several sub-projects and understanding the start and stop of a R&D project(s) within an overall project, is often not a straightforward exercise. Taking a narrow view of the R&D project may result in sub-optimal claims.
Many companies also miss out on claiming for planning and project management activities as well as Qualifying Indirect Activities (QIAs). QIAs are activities which form part of a project but do not directly contribute to the R&D activity. These include activities such as the preparation of reports of R&D findings, ancillary activities undertaken to support R&D such as the time spent in hiring staff for the R&D project, maintaining equipment used for the purposes of undertaking R&D, time of financial, clerical staff to the extent that this relates to the R&D projects, etc. Including these activities and related costs gives an upside to the claims.
Quantifying costs relating to R&D eligible activities
Once the R&D eligible activities have been identified, the next step is to collate and quantify the associated costs. Here too, many companies do not fully capture the qualifying R&D costs. Examples of costs often missed out relate to cash allowances, including bonuses, employer contributions to pensions and National Insurance in the calculation of qualifying R&D staffing costs, as well as the costs of software licenses and water, fuel and power. For more information on R&D qualifying cost categories please see
Summary
Whilst many companies are already taking advantage of the R&D tax incentives schemes, a thorough understanding of the R&D definition for Tax purposes and full review of your company’s activities for R&D eligibility and costs will deliver an maximised/optimised claim.
This publication has been written in general terms and we recommend that you obtain professional advice before acting or refraining from action on any of the contents of this publication. iTax Advisors Limited accepts no liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.