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ARE YOU CLAIMING THE CORRECT AMOUNT OF R&D?

Nov 11, 2020 JONNY BREWSTER

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Our recent article in Taxation provides some commentary on HMRC’s recently released R&D statistics.

They paint a picture that these reliefs continue to grow; by this point last year, HMRC had received around 48,500 R&D claims for the 2017/18 financial year.  This year, that number’s increased by over 10,000 to just under 60,000 – that’s more than 20% up.

Now, there are a number of reasons which might explain this rise:

1) Businesses might be pulling forward R&D claims to improve their cash flow;

2) Businesses might be doing more R&D; or

3) Awareness of the regime continues to grow.

SO WHAT?

If you’ve not read HMRC’s release – and why would you? – there are two key takeaways beyond the above, around the average benefit of R&D claims.

Check out this table showing the average claim benefit per sector (2018/19):

Firstly, the average benefit per sector is remarkably consistent across almost all sectors.  For SMEs, this ranges between around £35,000 and £95,000. This is surprisingly consistent, given the broad range of industries that are claiming – I suspect most people would expect that the biggest claims would sit within the “Professional, Scientific & Technical” and “Information & Communication” sectors, given their more ‘typical’ R&D activities.

This is further evidence, if it were needed, that “R&D” means way more than it might first appear.

Secondly, an average claim value of more than £57,000 is up over 15% compared to two years ago, when the typical claim benefit was less than £49,000. So, with the average claim increasing by that amount, it would be reasonable for companies to look at their own claims; have these increased by the same?

SO WHAT?

Not every claim can be ‘above average’. A small, 10-person business will never be able to claim as much as a multinational, and a business that delivers broad services in an industry is likely to have less qualifying spend than one (of the same size) that is focused on serving a particular niche within that industry.

Similarly, not all claims should increase year-on-year – but if your claim hasn’t increased, or has even gone backwards when the rest of your industry is moving forward, it hints at an R&D tax relief claim process needing a bit of TLC.

SO WHAT?

Bigger isn’t always better. In fact, when it comes to judging how good a claim is, size is only one aspect of it. What matters most is value. That might appear semantic, but value encapsulates a combination of things; as well as size, equally important are robustness and burden.

There’s no point in making a huge claim if it’s going to get thrown out by HMRC because the methodology isn’t fit for purpose, or if it risks engulfing the company in a protracted enquiry that rumbles on for years and takes its development team away from their day job.

I’ve lost count of the amount of companies I’ve told that a claim probably isn’t worth it for them – by the time they’ve factored in their time and effort, and the cost to the business of them not doing what they’re actually being paid for, the net result is marginal.

SO WHAT?

A ‘good’ claim strikes the right balance between capturing qualifying activity and the effort required by the business to do so. It requires a sense of pragmatism that comes with the experience of making R&D claims.

A good R&D advisor will use their knowledge and experience of a company’s sector to help you assess whether a claim of ‘average’ value is reasonable for your business, or a minimum target / pipedream for you. They’ll also help you develop and utilise a methodology that strives for that perfect balance of reward vs. effort.

ONE MORE “SO WHAT?” – COVID-19 INTERVENTIONS

Fresh from our recent webinar, we discussed the impact of the various COVID-19 government interventions on R&D claims.

In short, there are two key takeaways:

Firstly, if you’ve been claiming for CJRS (or ‘Furlough’) and the staff that have been furloughed have taken some time as annual leave or sick leave, a proportion of that is claimable.  How much depends on a number of factors, including length of furlough, amount of leave, how qualifying the staff member typically is and whether you’ve provided only the 80% CJRS income to the staff member or if you’ve ‘topped up’.  Clearly, the more people a business has furloughed, and the longer they’ve been furloughed for, the more that could be reclaimed by way of R&D.  We have models that help estimate the likely return, taking into account all of the relevant factors.

Secondly, if you’ve claimed CBILS / CLBILS / BBLS, and they relate specifically to the same project that you’re claiming R&D for, then your business could face a triple whammy:

1) The claim moves from the SME relief regime to the RDEC regime; a reduction from a c25% benefit to a c10% benefit;

2) If any part of your (previously SME) R&D claim involves subcontracted work to a third-party company, that’s not allowable in the RDEC scheme, so the benefit is reduced further.

3) Finally, CBILS / CLBILS / BBLS are loans. That money has to be paid back at some point.

In effect, that short-term cashflow boost might actually cost you money in the medium-to-long term.

If you’re not sure if you’re affected and want some help to get to the bottom of it, or if you know you’re affected but want to talk about your options (such as giving your R&D claim process a review to see if some of those reductions could be mitigated by a bigger claim) then we’re here. Feel free to drop me an email at jonnyb@cooperparry.com

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