Entrepreneurs and small company owner/managers are faced with many uncertainties and issues they need to address in order to ensure that their company is able to compete in today’s dynamic market. With a list of worries ranging from perfecting a product to managing cash flow, the thought of starting a new R&D project may be too large a risk to consider, and, as such, may be placed further down a company's list of priorities.
However, the importance of a company’s focus on continuous improvement is imperative to maintaining competitiveness in a market which includes competitors with access to higher levels of capital.
The UK government’s R&D Tax Credit Scheme offers assistance to companies in the form of tax relief on qualified R&D expenditure. For small to medium enterprises (“SMEs”) the credit is currently offered at a rate of 230% of qualifying expenditure. This tax relief, in the case of a loss, can also be converted into tax credits.
The Chancellor of the Exchequer’s March 2015 Budget (for an overview of what was announced read my prior blog R&D tax credits - a summary) has further improved the scheme by addressing the uncertainty companies faced as to whether the R&D costs incurred throughout the year would qualify for the credit which was assessed as eligible at the time the tax return was filed (i.e. after the expenses were incurred). The following change will come into effect from late November 2015:
Small and medium enterprises that have not previously claimed R&D tax relief will be able to apply for “advance assurance” on whether their projects qualify for the credit, and which will last for up to three years. This will allow SMEs to focus on R&D projects without the uncertainty as to whether their R&D expenditure will qualify or not. SMEs will be able to sit down with HMRC specialist units and discuss their proposed projects. Once the company and HMRC come to an agreement over the eligibility of the projects, advance assurance will be granted.
Although HMRC has not yet released the formal application procedure and requirements for obtaining R&D tax credit advance assurance, SMEs can start getting ready to adopt the new set.
To start, SMEs should identify projects that will generate the highest returns and that create a competitive advantage. Once projects have been identified they must then be assessed to determine if they qualify under HMRC’s guidelines. The HMRC requirement for eligible projects for R&D tax relief is stated below:
"[A project must] achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty - and not simply an advance in its own state of knowledge or capability.”
The key to qualifying projects for the R&D tax credit schemes is being articulate when describing the advancement in knowledge or capability, and when describing the scientific or technological uncertainty that would be resolved. Additionally, if the knowledge sought after already exists outside of the public domain or if there is public knowledge of failed attempts by others to resolve the uncertainty, it must be declared to HMRC. In either case, the project can still move forward because there is a scientific or technological uncertainty to be resolved.
If there is no public knowledge of attempts, information containing the credentials of all the researchers leading the project must be provided, along with statements from each of them explaining why the uncertainties are scientific or technological. This is needed to show that the researchers are competent professionals.
Moreover, the project outline must not contain any activities that do not directly contribute to R&D or do not qualify as indirect activity (i.e. product development, materials for production and distribution, general support services, etc.). A full list of activities that qualify can be found on the HMRC website at www.hmrc.gov.uk/manuals/crdmanual/CIRD81900.HTM.
In addition, HMRC states that projects must be related to a company’s existing trade or to one that it intends to commence based on the results of the project. Project outlines should be tailored to clearly address these requirements in order to successfully apply for Advanced Assurance. Drafting the project overviews that address the eligibility requirements ahead of time would help expedite the advance assurance application process.
We will be following the latest HMRC announcements with relation to R&D tax credits and particularly with regards to the procedure in relation to obtaining advance assurance and will be sharing this information in subsequent blogs.
Advance assurance for R&D Tax Credits offers SMEs an opportunity to expand their R&D operations without the risk of failing to qualify every year. With the introduction of advance assurance, companies can focus on R&D without worrying as to whether the expenditure incurred will be eligible for tax incentivisation.