The principle behind our Business Accelerator service is the “Now, Where, How” framework, which helps businesses and individuals facilitate growth by working through three questions. This can be universally applied to clients who are eligible for Research and Development claims:
- Where are we right NOW?
- WHERE do we want to be?
- HOW do we get there?
If we start with the NOW. Understanding where a business currently sits, both financially and non-financially is incredibly important to effective decision making. R&D claims are calculated by assessing the qualifying costs incurred by the business. To complete a claim, clients must track these costs. Easier said than done!…
Some companies have the benefit of job costing software, which lists qualifying costs of every project; others maintain detailed spreadsheets which they update in real time. However, a lot of businesses do not have any records maintained and still treat their R&D claim as a once-a-year exercise.
There are some problems with this: firstly, there is a significant amount of time needed to pull together the supporting documentation, such as payroll reports, invoices and project databases, and consolidate it into a list of qualifying costs. This task can be made more difficult when considering projects, which have been completed a year or two prior to preparing the claim. The long gap between the project completion and the preparation of a claim also influences the quality of the evidence that you can present to HMRC in the technical justification report. Not all companies have the benefit of timesheets or job costing software to help identify staff costs on projects. As a result, it is an accepted practice to pro-rata competent professionals’ remuneration at a percentage, which reflects the time they spend doing direct or indirect qualifying R&D activities, provided the percentage used can be justified with appropriate evidence. By considering qualifying costs on an annual basis, there is a need to have almost perfect recall of every single project undertaken in the year, in order to fully understand whether it met the criteria of R&D, which staff members worked on it, how much time did they spend on it, what materials were used etc. This method gives rise to too much speculation and innuendo, which could result in over or under claiming your qualifying costs and HMRC disputing the claim.
Maintaining up to date R&D records gives you potential insights into your business, such as an understanding of your corporation tax position. SMEs can monitor their taxable profits by simply uplifting qualifying R&D costs by 130% and deducting it from the net accounting profit figure. This gives a clearer picture of the company’s cashflow as they are aware of any R&D rebate payable. There is a compelling case to ensure that R&D records are maintained in real time.
If we next look at the WHERE. I’ve been astounded to see how many of our clients’ offerings are designed, almost by accident, to benefit from R&D tax relief. This is primarily because of the emphasis they put on the design of their service. Whether it be:
- a fabrication business that is asked to make a component lighter or more heavy-duty,
- a food manufacturer that is tasked to replicate an existing product for the vegan market,
- a ventilation specialist designing a bespoke LEV system for a customer with specific extraction requirements.
In all these cases, there is significant R&D activities involved prior to the delivery of the product/service. Indeed, clients often respond to this epiphany with disbelieve, as they can’t understand that something, which is so ingrained in their sales offering is so generously rewarded. The design / product development is more often something they don’t charge for as it is necessary in order to carry out the engagement. Therefore, it is also something which is strategically neglected. However, with the realisation of the importance of R&D claims and the tax relief associated with them, directors should be considering innovation as an area of more strategic significance.
If the company is benefiting from R&D tax relief then, perhaps there should be specific targets put in place. The end goal could be for the business to have a designated R&D department with “X” number of staff in place. Maybe, the company want to look at developing their own brand of products similar to the ones that they produce for customers. In any case, by setting these end goals down on paper, business owners can look at ways of making them a reality.
This is considered in the HOW. R&D does not operate in isolation, it impacts all areas of the business and thus should be included as part of a holistic strategic review.
Making an R&D claim will have an impact on cash flow, as it will result in either a reduced corporation tax liability or a tax credit. It will also impact funding decisions. Whether it is deciding on whether to use external funding to expand or adopt a more organic approach, factoring any potential tax credit payable to the company will help make a decision. Perhaps a business is exploring whether to borrow or seek grant funding in order to boost liquidity, in which case understanding the state aid rules in relation to R&D might be a decisive factor in their decision. Similarly, R&D may impact personnel and remuneration decisions. If the business is wanting to maximise their R&D relief, they may look into creating specialist R&D positions, which fully focus on product/service development. If business owners are heavily involved in the R&D activities then there is a conversation to have about how they remunerate themselves, as suddenly a high salary low dividend policy may be more tax efficient when considering the business and individual tax liabilities combined. Research and development also affect sales strategy, as it becomes a sustainable comparative advantage over competitors and therefore want to leverage their design to customers and prospects to win more work.
At Robson Laidler we propose a new way of approaching R&D claims. Rather than a once-a-year conversation about what has happened over the previous year, how about quarterly sessions, which focus partly on improved cost collection and project identification in real time. We can also discuss and implement an R&D strategy for your business. Whether this centres around growing your R&D activities, improving efficiencies in terms of personnel and remuneration, or how you structure your sales options.
Get in touch to learn more.