Question: What allows you to claim 230% of your actual expenditure against tax?
Answer: The research and developments tax relief scheme for SMEs (small and medium sized enterprises).
Someone in number 10 Downing Street, or number 11, is obviously very keen to promote innovation in the UK. This is reflected not only in the increase from 225% of expenditure to 230% on 1 April 2015 (why was it thought worthwhile to change the figure by 5%?) but also by the introduction, from November 2015, of an advance assurance programme.
In today’s world of ever growing tax ‘sticks’, it’s nice, every now and again, to come across a ‘carrot’. And the research and development (R&D) carrot is definitely very large and juicy. If you can show that what you are doing is innovative, not just from the point of view of your previous knowledge but from the point of view of what is known generally, your expenditure in pursuing this innovation, on staff costs, consumables, and sub-contractors, can be multiplied by 2.3 in calculating how much you can set off against your profits for corporation tax purposes.
Evidence suggests that the take up of R&D tax relief by companies is surprisingly low, given the generosity of the relief available. Perhaps this is because companies are afraid of the taxman and don’t want to do anything to attract attention to their businesses; but, more likely, in our view, it’s a question of simple ignorance.
The advance assurance programme is perhaps aimed at tackling this problem; of companies simply being unaware of what they are entitled to. However, the reasonable point could be made that, if you are not aware of R&D tax relief and its benefits, you’re also not likely to be aware of the advance assurance programme!
Is your company eligible?
Despite the title, and the reference to SME’s, the programme is actually aimed only at small enterprises – and only the smaller ones at that. What’s more, there are restrictions as to who can use the scheme, even within this narrowed down category.
Firstly, anyone with an annual turnover of more than £2 million can’t use the scheme. Nor can anyone who has 50 or more employees.
Even more potential users of the scheme will be weeded out by the stipulation that you can’t use the scheme if you’ve claimed R&D tax relief before. It seems that this prohibition will apply even if the particular R&D you claimed for in a previous period has nothing to do with the R&D programme you are doing now.
Also, HMRC can’t resist having yet another dig at their favourite enemies, in particular ‘aggressive’ tax avoiders. Any company that has entered into a disclosable tax avoidance scheme (one which needs to be notified to them under the DOTAS – disclosure of tax avoidance schemes – rules) will have its application for advance assurance thrown into the HMRC waste paper bin. So will any applications the taxman receives from a ‘corporate serious defaulter’.
In considering whether a company meets the turnover, etc. thresholds, you have to take into account group and associated companies.
Although no-one asked us for our opinion, the £2 million turnover threshold seems particularly mean-minded. Bearing in mind that our hypothetical company, which is turning over less than £2 million, must be a standalone entity without any associated or group companies to lean on, it seems that not many companies in what might be called, without any derogatory intention, the ‘very small’ category are actually going to be able to afford to spend any substantial amount on R&D. It obviously depends on the type of business, but we are going to be weeding out a lot of potential claimants in this way. Also, using turnover as a measure seems arbitrarily to favour the sort of business that incurs its R&D before building up a substantial trade rather than those who do so afterwards.
Applying for advance assurance
Be that as it may, having now eliminated quite a high proportion of potential claimants, what do those who are left have to do to make their application?
Inevitably, the first thing you have to do is fill in a form, which can either be online or on paper. The form is CT R&D (AA), and can be found on the HM Revenue and Customs (HMRC) website. This has to be accompanied by the accounts for the company, registration documents from Companies House, any HMRC correspondence, previous company tax returns (not needed for new companies) and the name of the main contact, who has to be someone with a direct knowledge of the company R&D. When HMRC receives the form, they’ll contact the nominated person to ‘talk about the company’s activities in more detail’. This will probably be a telephone call, but in more complex cases – be warned – HMRC may choose to visit the company.
Once HMRC is satisfied that the company qualifies under the rules of the research and development scheme, they will send a written ‘decision’ letter. It seems that advance assurance will be given for up to three accounting periods; but be prepared for a lecture, and a lot of bumph, explaining your responsibilities. It all sounds a bit like inviting the headmaster to give specially detailed attention to your homework!
And, of course, there’s the possibility that the application for advance assurance might be turned down; that is, HMRC may tell you that they think you don’t qualify for the tax relief. At the end of the day, it’s your decision, under self-assessment, of course, as to whether you claim a relief or not. However, it’s an interesting question as to whether HMRC might seek to charge penalties if you’ve had a ‘no’ answer and nevertheless go ahead with a claim.
Practical Tip:
To sum up, first of all you have to make sure that you are one of the (comparatively) lucky few who qualify for the advance assurance programme. Secondly, you have to decide whether the advantage, which is knowing sooner whether you qualify in HMRC’s view for this very generous tax relief, outweighs the disadvantages of asking the taxman in to your business, and risking an unfavourable response which really rather forces your hand in terms of how you do your corporation tax self-assessment return. There’s undoubtedly an element of a gamble here, which is particularly risky for companies whose activities may fall into any kind of ‘grey area’.
