R & D tax relief –How best to make a claim

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In the latest UK200Group blog post, Mike Chapman,Director of Corporate Taxation, Knill James looks at the elements required for making a successful claim for Research & Development.

Mike Chapman, Knill James
The benefits to be obtained in making a successful Research & Development (R&D) tax claim were evident from the introduction of the regime, initially just for SME companies, in 2000. Since then the scope and benefits of making a claim have increased and are part of the Government’s drive for the UK to become an innovation economy.

At its heart there are two aspects to formulating a successful claim:

1. Determining whether the company is undertaking a qualifying R&D project
2. Identifying and quantifying the costs involved.

Qualifying expenditure

In respect of the latter, the checklist to follow to qualify expenditure must be:

• revenue and not capital in nature,
• related to a trade that the company carries on,
• allowable as a deduction in computation of the taxable profit,
• related to an activity that directly contributes to seeking an advance in science or technology,
• or a qualifying indirect activity,

But remember the expenditure can only be incurred on:

• staff costs
• software
• consumable materials
• subcontracted R&D costs (with restrictions for non SMEs)
• or externally provided workers

Qualifying project

This is the more qualitative part of the claim requiring judgement on the part of the practitioner. For a project to qualify, it must seek to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty.

The claimant company should ask various questions to satisfy itself that a project qualifies. These should be the same questions that HMRC would ask in the event of an enquiry, such as;

• What is the R&D project and, if relevant, what is the larger commercial project?
• What are the scientific or technological uncertainties involved in the project?
• How are those uncertainties being overcome?
• What methods are being used to overcome the uncertainties?
• Are the methods of overcoming the problems themselves scientific or technological advances and if so what are those advances?
• In what ways does the project go beyond the current state of knowledge?
• Why is the project or capability not readily deducible by a competent professional in the field?
• When were the particular uncertainties overcome?

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