Is it really worth claiming R&D tax relief for a loss-making company?

The short answer is yes - absolutely. However, we've still found that many businesses have failed to claim for R&D tax relief simply because their company is making a loss and they didn’t realise they were entitled to it.

Loss making companies are still able to make a claim for R&D tax credits from HMRC although the value of the credit depends largely on the regime of the company.

What is the specific definition of a loss-making company?

A loss-making company is quite simply one which is not currently turning a profit. This could be for a huge number of reasons including a temporary drop in customers, a recent restructure, the fact it’s still new and growing, or simply because it’s struggling to compete. All of these can mean R&D tax credits are a real lifeline.

What are the qualifying costs for R&D tax credits?

There are a number of costs which are eligible for R&D tax credits. These include:

• Direct Staff Costs – These are the costs of paying employees to work on the R&D project directly and may include:
  • Salaries
  • Wages
  • Pension fund contributions
  • Bonuses
  • Class 1 National Insurance Contributions
  • Reimbursed R&D-related travel costs
    
    
• Agency workers (EPWs)

EPWs are workers which have been provided temporarily by an external agency. The main difference is that their contract is with the agency, not with the company they are currently working for. Tax credits are generally applied on 65% of the payments to this external agency, no matter what size a company is.

Like staff employed in the usual way, the cost of an EPW must be apportioned based on the time the worker has spent on the R&D project being claimed for. Note that any VAT charges applied by the EPW should not be regarded as part of their cost.

• Subcontracted R&D

By enlarge, subcontracted R&D refers to elements of your R&D project that have been outsourced to another company for an agreed set cost. If, for example, a company hires an external firm to develop some technology on its behalf for use in testing a new product, this can be considered subcontracted R&D. The good news with this as well is that HMRC specifies that if R&D works qualify for R&D tax credits then sub-projects which are part of the main project will also be eligible, even if there is an element of ‘routine’ work involved. So, if a contractor is working on a sub-project that includes some routine work, but the sub-project plays a role in the larger project that qualifies for R&D tax relief, then the subcontractor’s costs will qualify for tax credits.

As with all employee costs, a subcontractor’s fees must also be apportioned based on how much time was spent specifically working on the R&D project concerned. Like EPWs, a company can claim up to 65% of the costs of subcontracted R&D.

Note that generally only SMEs can receive tax relief for Subcontracted R&D expenses. Unless the work is done by an organisation like an institution of higher education, health service body or charity, larger companies are not eligible to claim for Subcontracted R&D. If this is the case, it counts as contributing to independent research.

• R&D consumables

Consumables are classed as resources and materials that are used up during the R&D process. These could be things like parts, light, water and heat (although not electricity). The cost of consumables generally falls into one of two groups: wholly R&D expenses and apportioned expenses. Utilities like gas and water are apportioned expenses, so you should claim an amount based on how much of the cost is directly attributable to R&D.

• Software

When applying for R&D tax credits, companies are allowed to claim 100% of the cost of software which has been purchased purely for use in R&D activities. If the software has only partly been used in R&D, its price should be apportioned based on the amount of use related to R&D.

• Prototypes

100% of the cost in designing and making prototypes required to test an R&D activity is eligible for R&D tax credits. The exception to this is if there are plans to sell the prototype after use, and if this is the case then only some of the prototype’s costs will qualify.

• Contributions to independent research

These are payments made by larger businesses to other organisations undertaking qualifying R&D projects. These payments are eligible for tax credit relief, as long as the organisation receiving the money is conducting research relevant to the larger company’s field or industry. As mentioned, the receiver must also be a “qualifying body” such as an educational entity, healthy body or charity.

• Clinical trial volunteers

If a company (such as a pharmaceutical firm) engages volunteers to take part in clinical trials, the costs of this research will eligible for R&D tax relief.

How do I square this with HMRC?

In order to receive R&D tax credits, your CT600 must be filled out and filed correctly. Additionally, you must provide an explanation of what R&D projects your company carried out and why you believe they qualify (referred to as a Technical Narrative). Lastly, you must submit a calculations table to justify the amount of claim you believe you should receive.

The key point in filing all this is to convince HMRC that you have followed their criteria about what costs and activities are eligible, and have carefully adhered to them accordingly. If HMRC believes you are correct and everything is accurate, they will issue you the amount necessary typically within 2 to 8 weeks. A rolling banner on our homepage keeps clients up to date with which claims HMRC are currently processing.

However, if HMRC have questions or think you’ve got it wrong, an HMRC enquiry could be launched. These represent a massive headache for the company being investigated and more time and effort involved in making any corrections. At best, the result could be simply a few further questions that delay you by a few weeks. At worst, hefty action including sizeable penalties can be applied for misfiling.

How can Myriad Associates help?

We are experts in all areas of R&D tax relief, grants and CT600 completion, and have worked with many loss-making businesses over the years. In fact, if you have any questions at all - regardless of your company’s financial situation - we can help.

To speak to one of our R&D tax relief experts, get in touch with us today on 0207 118 6045 or use our contact page.