TT326: R&D tax relief – Still a valuable relief despite the AHK case
Even in these difficult times the government want companies to claim R&D tax relief, where appropriate. The benefit of the SME scheme, for companies that have less than 500 employees and for some companies that have 500 or more employees, is that the corporation tax deduction for qualifying spend is increased by 130%. This means that a 130% additional deduction saves tax at a rate of up to 24.7%.
The total tax relief on R&D qualifying expenditure (230%) is 43.7%
During this time of pandemic company profits may fall and some companies may incur losses. If a loss (after deduction of the 230% R&D relief) is incurred then an amount up to the lower of the 230% deduction or the loss may be surrendered for a payment from HMRC at a rate of 14.5%
Qualifying R&D spend of £1000 equals payment from HMRC of up to £333.50
(33.35% of spend)
At a time of falling profits this can provide valuable cash flow to a company.
Why aren’t more companies claiming R&D tax relief
R&D tax relief covers many activities and it is not always straightforward to identify R&D projects that qualify for the relief. Some companies are doing qualifying R&D but don’t realise it.
Should you be worried by the AHK case? – Barnes Roffe think not
AHK recruitment Ltd was a company that provided human resource services including recruitment services. The company decided to develop software, using artificial intelligence, to match candidates with available positions. Most of the development work was outsourced to third parties. AHK worked with a third party R&D firm who prepared the R&D claim for submission to HMRC. HMRC raised an enquiry into the claim and eventually the case was listed for hearing before the first tier tax tribunal. The tribunal found in favour of HMRC and denied the R&D tax relief.
The problems in the AHK case
The tribunal found the following difficulties with the case presented by AHK:-
- There was a lack of technical detail included in the report submitted to HMRC. The narrative discussed the social science of the project not the overall increase in technology
- The technological uncertainties were not clearly defined
- Invoices from sub-contractors did not state what work had been done and no back up documents were submitted to the tribunal
- There was no individual available who had contemporaneously worked on the project to provide evidence to the tribunal
- There were long delays caused by the taxpayers and their advisors
- No evidence was submitted to the tribunal that dealt with the lack of technical detail in the initial report
At Barnes Roffe we do not think that the AHK case is a problem. A properly identified R&D project together with a well constructed report explaining why the project qualifies for relief, highlighting the technological uncertainties identified at the outset and stating how those uncertainties were overcome, where appropriate, should result in a successful claim.
We have long subscribed to the belief that R&D tax relief should be maximised within the boundaries of tax law and HMRC practice. This is a generous relief. However, there are firms who wish to push the boundaries. As we see in the AHK case the taxpayer, when faced with HMRC challenge, couldn’t back up their claim with sufficient evidence. If a claim is enquired into there is a minimum level of information that HMRC would expect to see. If you would like a copy of the Barnes Roffe “R&D information summary” then please email your usual contact partner.
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